US natural gas rises 81% in 7 weeks, hits new 14-year high, dips to rest in June and July

Not all resources plummet: Game of Inflation Whac A Mole.

By Wolf Richter for WOLF STREET.

Here we go again. This morning, notoriously volatile natural gas futures, which have destroyed countless hedge funds over the years, have risen to nearly $10 per million Btu and are currently trading at $9.75, the highest since July 2008, a 146% increase from a year ago, and up 350% from three years ago, complementing a series of spikes that began in early July, just as people were getting used to the plunge in commodity prices.

The price has now fully recovered from the decline that began on June 8, when a fire damaged and closed 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 part of the plant that is damaged takes longer.

The closure of the LNG export facility eliminated some of the demand from the US and the fall in prices was a classic knee-jerk reaction that has now settled. Since its low on June 30 ($5.39), the price is up 81%:

The decline in natural gas futures prices in June-July was one of the cited reasons why US inflation has peaked. Utility natural gas piped to homes accounts for about 1% of the total CPI. In July’s CPI reading, gas piped to the home fell 3.6% from June, the first month-to-month decline since January, and a welcome relief from previous months’ spikes, including +8, 2% in June from May , and +8.0% in May from April.

Peaks in futures prices don’t immediately translate into higher natural gas prices at home, but eventually they do. And this is another example of the inflation game Whac A Mole, with price spikes popping up here and there.

Natural gas also fuels electricity prices through power generators, food prices through fertilizers made from natural gas, and the prices of many other products.

The two-year rise in natural gas prices was driven by US LNG exports booming, with new LNG export terminals coming online one after the other – seven since 2016. A small LNG terminal in Kenai, Alaska , has been operational for years. LNG exports contributed to the demand for US natural gas and increasingly linked US natural gas prices to global LNG prices.

For natural gas-fired power plant operators struggling to meet air conditioning demand, the blow to natural gas export capacity came just in the nick of time this summer, and the fall in natural gas prices over the summer was a godsend. But that’s over now.

The export of LNG has increased enormously since 2016. The US also exports natural gas via pipeline to Mexico and to a lesser extent to Canada, but pipeline exports have remained about the same in recent years. What has added new demand on a large scale in the US is the LNG export terminals.

The EIA has released LNG export data through May, which does not yet take into account the potential drop in exports in June and July due to the closure of the Freeport LNG terminal. It will release June export data at the end of August:

But even at today’s price, natural gas futures are well below their peaks in 2005 and 2008, and slightly higher than in 2000. Back then, there were natural gas shortages and LNG import terminals were built to import expensive LNG to the US.

This episode was followed by the boom in fracking, which made the US the largest natural gas producer in the world, causing the price of natural gas in the US to collapse, bringing many of the largest natural gas frackers to court, including Chesapeake.

And now the US natural gas market is connected to world markets through large-scale export terminals that arbitrate much of the price difference between US natural gas and global LNG prices. So welcome to the new old world of higher natural gas prices.

Seen in this light, the current price of natural gas in the US is not that extraordinary, and still a lot lower than in many other parts of the world:

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