Fall 2022 Update: What’s Happening in the Energy Market – And Why
In the last year, energy prices have hit historic highs across the globe, due in large part to significant volatility in the natural gas market – and challenges in keeping up with ever-growing energy demand.
In this article, we share insight from our Director of Gas Supply, Paul Leanza, on the forces affecting the energy market, what's in store for prices over the next several months, and the things businesses should consider as we head into winter.
Factors affecting energy prices
Let's explore the factors affecting energy prices today.
Production and transportation challenges
It's been an unusual year for natural gas production. Typically, we see a surge of production during the summer, but it wasn't until September that we saw a significant uptick.
Stalled production is due in part to a drop in the number of drilled-but-uncompleted wells; since the start of the COVID-19 pandemic, about 4,600 of these wells have been completed, while newly drilled wells increased by 700. We'll need to rely on new wells to increase production to meet growing demand.
Additionally, several key natural gas pipeline projects have been cancelled in the last two years, while others are on hold.
Growing exports of liquefied natural gas
In recent years, U.S. exports of natural gas – notably liquefied natural gas (LNG) - have grown substantially.
Since 2016, exports of LNG have increased from 0 BCF a day to more than 14. Currently, around 20 percent of the natural gas produced in the U.S. is exported to Mexico.
Demand for LNG – and domestic producers' response – is a primary driver of price.
Industrial demand remains high
Historically, when natural gas prices rise, demand drops in the power and industrial sectors. But demand remains high, which could lead to greater volatility during the winter, when broad demand for natural gas rises across sectors and consumer segments.
A boost to natural gas storage
There's some good news for natural gas storage: Heading into winter, estimated storage amounts are healthier than initially assumed, about 3,500 BCF. This storage boost is due to the recent increase in production and the temporary shutdown of LNG export facilities for maintenance.
World events and headlines
In addition to domestic production challenges, energy prices have been affected by several unexpected and atypical global events, including the Russian invasion of Ukraine, and greatly reduced Russian natural gas deliveries, as well as European mandates to fill gas storage before winter.
It's worth nothing that, while high, domestic LNG prices are still low (currently: $6.50) compared to other markets:
- $54 in Europe
- $45 in South America
- $40 in Great Britain
- $39 in Japan and Korea
Where prices can go
Though we can't say for certain what prices will look like in the future, one thing is likely: Volatility will remain.
Given recent volatility, the Energy Information Administration (EIA) notes that it's possible we'll see historically high natural gas prices for February 2023.
If you're responsible for making energy decisions for your business, keep in mind that long-term energy prices are still affordable – and should be considered carefully by energy buyers.
With the newly normalized global demand for natural gas, now might be the time to lock in for a longer term at the current price.Get more market commentary