Natural Gas LNG Exports Bring Price Volatility to US Gas Market

Editor: Dominik Stephan

The period of cheap gas and energy prices that the US enjoyed during the past decade could soon see dramatic changes: The prices will become highly volatile once large scale gas exports begin, a new study says...

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(Picture: PROCESS)

The price of Henry Hub, a major pricing point for natural gas futures in the US, will become significantly more volatile once US LNG exports begin. A new study by the PIRA Energy Group expects that the the more export capacity that is approved and built, the greater the volatility will be. The study, entitled “Liquefied Henry Hub: The Repercussions of North American LNG Exports at Home and Abroad,” concludes that much of the natural gas market's attention is focused on how Henry Hub gas pricing will influence the world once LNG exports begin. An equal, if not greater, concern should be placed on how gas markets in the rest of the world will affect Henry Hub pricing because the influence will be significant. Specifically, the study notes that with US. LNG exports forecast to crest at ~9 BCF/D (~91 BCM/Y) by 2025, including ~8 BCF/D (~81BCM/Y) from the Gulf, the call on U.S. gas production will account for 5-15% of the total. According to author Mickey Kwong, “Depending on the degree to which this new form of demand is indifferent to North American market developments, the Henry Hub price ramifications will be substantial, at least in the short-term.”

From Natural Energy to Middle Eastern Policies – What Affects Gas Prices

The PIRA study addresses the multitude of gas price drivers around the world that will influence Henry Hub pricing, once LNG exports begin later this decade. Issues ranging from Russian gas production and seasonal gas use in a storage-short Europe to Japanese nuclear policy and bearable gas prices in Asia will have a direct impact on Henry Hub prices on a daily basis much the way issues in the Mideast or West Africa influence crude oil prices.

According to the study, price volatility for Henry Hub will also be influenced by LNG-related changes in the supply/demand balances within the North American market. The timing of new supply, combined with domestic gas demand growth from low Henry Hub prices and the stability of LNG production, add significant layers of complexity to the movement of Henry Hub prices. Extended periods of time will emerge when North American LNG exports are “in the money” and “out of the money” in the global gas market context. Exactly how lifters of North American LNG react to these external market forces will work their way back into Henry Hub pricing.

“The Insular World of North American Gas Prices Will Be Exposed”

“The changing dynamic in the market is that the fairly insular world of North American gas markets and Henry Hub pricing will be immediately exposed to supply, demand, inventory, and pricing issues in other parts of the world,” adds Ira Joseph, Executive Director of PIRA’s Global Gas Group. “These factors were previously insignificant or ignored entirely by North American gas trade.”

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