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  3. /US natural gas futures are at their highest since 2008, tripling in a year: why we kissed goodbye to ultra-cheap natural gas

US natural gas futures are at their highest since 2008, tripling in a year: why we kissed goodbye to ultra-cheap natural gas

Economy / May 26, 2022 / DRPhillF / 0

The boom in natural gas exports is creating huge demand for US production and linking US prices to the rest of the world.

Written by Wolf Richter for WOLF STREET.

Natural gas futures rose to $9.40 per million British thermal units earlier today, the highest level since the dirt was small, well, since the massive double booms between 2005 and 2008. In afternoon trading, the price is down to about $9 Again, having tripled from last year, when it was $2.98, it has more than tripled from the $2-3 that prevailed from 2011 through spring 2021.

Natural gas prices can go up and down, periodically dumping hedge funds that have been caught on the wrong side. But it’s different this time. This time around, there are large-scale structural changes in the US natural gas market that have been in the works for years: the natural gas export boom as LNG creates a correlation to demand and prices in the rest of the world.

And the fracking boom that caused prices to crash in the U.S. starting in 2009, while prices rose elsewhere, are now being tapped to export LNG, and we’ve already accepted the collapsed natural gas prices of $2-3 per MMBtu British.

The hydraulic fracturing boom that took off 15 years ago has made the United States the world’s largest producer of natural gas. Before the boom, the United States was a major importer of natural gas (via LNG globally and via a pipeline from Canada), and prices were affected by global prices and by supply restrictions in the United States.

Production from the hydraulic fracturing boom created so much supply in the United States by 2009 that the price collapsed. Between 2003 and 2021, marketed production of natural gas nearly doubled. Note the sharp rise in production in 2018 and 2019:

This surge in US production set off a chain of events: Major natural gas producers, such as hydraulic fracturing pioneer Chesapeake, filed for bankruptcy; Energy production shifted dramatically from coal to natural gas, causing coal miners to go bankrupt; And large industries sprang up in the United States around cheap natural gas, including fertilizer producers who use natural gas as feed stock.

Beginning in 2016, more and more LNG export terminals were built to balance the cost difference between US natural gas and global LNG pricing; Pipeline capacity has been added to export more natural gas from US production areas near the border to Mexico.

Natural gas exports via pipelines to Mexico have grown at a steady rate (green line). But LNG exports have exploded (the purple line), from almost nothing in 2016, to more than 3.5 trillion cubic feet in 2021. Total exports were 6.7 trillion cubic feet in 2021, roughly 18% of Marketed production in the United States:

LNG exports require capital-intensive liquefaction facilities linked to pipeline production areas. Export capacity has increased from less than 1 billion cubic feet per day (Bcfd) in 2015 to around 12 Bcfd at the end of 2021. There are more LNG export facilities under construction, and there is still more to be It has been approved, and more is still in the early stages of the process.

As US export capacity continues to grow, global demand for US LNG competes to a greater extent with US demand, strengthening the link between global LNG prices and US natural gas prices.

And those dirt cheap natural gas prices of 2009 through mid-2021 that benefited consumers, power generators and industrial companies, that bankrupted many oil and gas producers specializing in natural gas fracking, and that bankrupted coal miners, are now a thing of the past. Much higher prices, in line with world prices, are what the United States has to deal with now.

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