Not all commodities hit bottom: Game of Inflation Whac A Mole.
Request Kurt Richter for WOLF STREET.
Here we go again. This morning, notorious natural gas futures, which have knocked multiple hedge funds down over the years, have jumped to around $10 per million Btu and are now trading at $9.75, the highest level since July 2008, up 146% from a year ago. It’s up 350% from three years ago, surpassing a series of spikes that began in early July, just as people were accustomed to falling commodity prices.
The price has now recovered all its decline, which began on June 8 when a fire damaged and shut down the Freeport natural gas liquefaction plant in Texas, reducing LNG export capacity by 17%. The plant is scheduled to resume exports at partial capacity in October. The damaged part of the plant will take longer.
The closure of the LNG export plant eliminated some of the demand from the US, and the drop in price was a classic spur-of-the-moment reaction that has now been resolved. The price is up 81% since the June 30 low ($5.39):
The June-July decline in natural gas futures prices was one of the reasons for the peak inflation in the USA. Natural gas delivered to homes constitutes approximately 1% of the total CPI. In July’s CPI reading, home use gas fell 3.6 percent from June, the first month-to-month decline since January, a welcome relief after spikes in previous months, including +8.2 percent in June from May. , and +8.0% in May from April.
Futures price spikes don’t immediately translate into higher natural gas prices domestically, but they do eventually. And this is another example of the Whac A Mole inflation game, where price increases come up again and again.
Natural gas enters electricity prices through generators, food prices with fertilizers made from natural gas, and the prices of all other products.
The two-year increase in natural gas prices was driven by the rapidly increasing US LNG exports. New LNG export terminals come online one after another – seven since 2016. A small LNG terminal has been operating in Kenai, Alaska for years. LNG exports have increased demand for US natural gas, increasingly linking US natural gas prices to global LNG prices.
For gas-fired power plant operators struggling to meet demand for air conditioning, the hit in natural gas export capacity this summer came just in time, with the fall in natural gas prices in the summer months. It is a gift from god. But that’s over now.
LNG exports have increased since 2016. The US also exports natural gas via the pipeline to Mexico and to a lesser extent Canada, but that pipeline exports have been roughly the same over the past few years. What is adding new demand on a large scale in the US is LNG export terminals.
The EIA has released LNG export data for the month of May, which does not yet include the potential decline in exports in June and July due to the closure of the Freeport LNG terminal. It will publish export data for June at the end of August:
But even at today’s price, natural gas futures are much lower than the spikes in 2005 and 2008, and slightly above 2000 levels. Back then, there was talk of a shortage of natural gas and LNG. Import terminals were built to import expensive LNG into the US.
This episode was followed by the fracking boom that made the US the world’s largest producer of natural gas, causing the price of natural gas to fall in the US and sending many of the biggest gas frackers to bankruptcy court. Including Chesapeak.
And now the US natural gas market is connected to global markets through large-scale export terminals, which has eliminated much of the price gap between US natural gas and global LNG prices. So welcome to the new old world of higher natural gas prices.
From that perspective, today’s natural gas price in the US isn’t all that extraordinary and is still much lower than in many other parts of the world:
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