Major Shifts in Global Energy Market Could Spell the End of Cheap Natural Gas
Surging international demand for LNG could bring tighter supplies, rising prices, increased volatility.
While U.S. natural gas futures prices have fallen sharply in recent months, higher prices and increased volatility could be on the long-term horizon as the energy transition accelerates and European markets respond to recent supply constraints. Rising U.S. exports of liquefied natural gas (LNG), fewer opportunities for fuel-switching between coal and gas and supply chain bottlenecks could all contribute to higher domestic energy costs in the years to come.
According to a new report from CoBank’s Knowledge Exchange, growth in U.S. LNG export capacity will lead to an increasing interconnection between previously disconnected markets, creating a situation where events in one market will strongly influence outcomes in others.
Signs of the interconnection between the U.S. and European markets appeared last year as U.S. natural gas spot prices for delivery near Boston peaked in December around $35.00/MMBtu, as Northeast buyers outbid their Asian and European counterparts to sustain a continued flow of LNG imports. While true competition last year was fleeting, Viswanath expects to see greater ties later this decade as the next buildout introduces greater spare capacity to the system.
Over the past three decades, competition between natural gas and coal enabled fuel switching in response to price surges of either resource. However, that competition is fading quickly as coal production declines and the market impact of electric power fuel-switching has diminished. Structural changes are now driving more pronounced price movements for natural gas.
It is unclear if U.S. natural gas production can ramp up fast enough to meet the simultaneous acceleration of export growth and domestic electric generation. Until recently, fracking has simply not proved a great investment. Many shale operators consistently outspent cash flows, burning through hundreds of billions of dollars to fund the past two decades of growth. Production rose, but lack of returns sparked an investor exodus that has yet to meaningfully reverse.
Watch a video synopsis and read the report, Is This the Beginning of the End for Cheap Shale Gas?
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