We remain concerned that natural gas E&P investment in the US remains too low to meet expected demand increases, especially for natural gas-fired power stations and LNG, but also possibly for NGLs, especially ethane, given new ethylene capacity and a fresh export market in Mexico. Near-term, natural gas prices are showing some easing relative to crude, albeit a very volatile trend – Exhibit below – but we see medium and longer-term shortages unless E&P spending increases. The new power facilities shown in the bottom Exhibit will all need incremental natural gas, and the international LNG market is so tight that as new capacity comes online in the US we would expect it to run as hard as is possible. This sets up for a market where the clearing price of natural gas in the US is at risk of being set by the marginal exporter. The price jump for domestic consumers would be dramatic and it would cause all sorts of headaches in Washington and probably intervention. We showed the incremental natural gas price in the Netherlands in our Daily Report on November 18th, and if the US price were to reflect the netback from this level, they would rise close to $30 per MMBTU. The natural gas industry needs some sort of global blessing to continue to operate as what will likely be the core transition fuel. It will be necessary to clean up the emissions footprint of natural gas, but the industry should be encouraged to invest on this basis. For those who doubt whether the US natural gas price can rise to $30/MMBTU – note that the Europeans did not think $30 was possible either.
Source: Bloomberg, C-MACC Analysis, November 2021
For NGLs the picture is slightly less clear as propane and butane are fungible with other transport and heating fuels and at some point, you get substitution if prices are too high. Ethane is different as most of the buyers, domestically and internationally face an alternative of not producing ethylene if they cannot afford the feedstock. A spike in natural gas prices, which pulled ethane up, would flip the global cost curve – penalizing those moving ethane from the US more than the North American pipeline buyers – but it would make US chemical exports very difficult and attract more chemical and polymer imports into the US, especially if the direction of container freight rates in Exhibit 1 (From Today's Daily) continues.
Source: EIA – Today In Energy, November 2021