Splinter is Coming: Gas Prices Likely to Spike Again as LNG Exports Grow

The coming months will be colder and costlier for many Americans seeking to keep their homes warm, particularly those relying on natural gas to heat them, the U.S. Energy Information Administration (EIA) said Oct. 12 in its Winter Fuels Outlook.

Reasons range from elevated prices in a tight market, low inventories heading into winter and LNG exporters taking advantage of stratospheric European and Asian prices.

The EIA forecasts a 28% increase in cost for households that heat with gas in its base case scenario, compared to the winter of 2021-2022. Households that rely on electricity for heating can expect a 10% increase in cost, and propane users will likely pay 5% more than last winter. The forecast assumes a 6%-7% inflation rate for the October-March period.

The National Oceanographic and Atmospheric Administration’s (NOAA) forecast for the winter calls for 6% more heating degree days (HDDs) than last winter and 2% more than the average of the previous 10 winters. A higher number of HDDs indicates lower temperatures.

“Natural gas prices are entering this winter season near the highest level since 2008.”—Joseph DeCarolis, EIA

“The outlook for temperature calls for enhanced probability of above-normal temperatures along much of the Southern Tier and along the East Coast,” said David DeWitt, director of the NOAA’s Climate Prediction Center, during the EIA’s webinar on Oct. 13. “There’s a much smaller region where below-normal temperature is favored in the Northwest and north-central part of the country.”

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Highest since 2008

Residential consumption of heating fuels is concentrated in the winter, said Joseph DeCarolis, the EIA’s administrator. For natural gas, particularly, 79% of residential consumption takes place from October through March.

Higher spot prices for gas are triggering the forecast for higher retail prices, the EIA said. The Henry Hub price at the end of the third quarter was 36% higher than last winter’s average.

“These price increases contribute to our forecast that residential natural gas prices this winter will be 22% higher than last winter and that residential electricity prices will be 6% higher than last winter,” the EIA said in its report.

“Natural gas prices are entering this winter season near the highest level since 2008,” DeCarolis said. One of the reasons for that is increased use of gas to generate electricity. Power plants are expected to use 5% more natural gas this winter, but the price of gas has essentially doubled compared to last year at this time.

“Exports are becoming a lot bigger deal for the market and that’s a trend that’s not going to be slowing down anytime soon.”—Rusty Braziel, RBN Energy

Also, utilities are less able to switch to coal when it is cheaper because of the continued retirement of coal-fired power plants, lower stocks of coal for existing plants, and constraints on delivering coal to the facilities, he said.

“Overall, we’re seeing a relatively inelastic demand for natural gas,” DeCarolis said.

Also contributing is the build season. The time in which gas is stockpiled for the winter will close at the end of October or in early November. The U.S. is entering the winter season below the five-year average for inventory, making it vulnerable to volatile pricing if the weather doesn’t keep to government forecasts.

“If we have a significant significantly colder winter, you can see that we’re really going to have to draw on those inventories,” he said. “We could dip below the five-year range and begin to approach the record low that was set in March of 2003.”

The export factor

A key factor affecting domestic natural gas supply that has grown in importance is LNG, which now accounts for about 11% of U.S. production.

“Exports are becoming a lot bigger deal for the market and that’s a trend that’s not going to be slowing down anytime soon,” said Rusty Braziel, CEO and principal energy markets consultant for RBN Energy. “Which means anytime there’s a blip in the export market, it can have a material impact on short-term supply-demand balancing. That’s exactly what we’ve seen this year.”

The blip was a fire at Freeport LNG’s facility in early June that has kept up to 2.1 Bcf/d of gas in storage and away from global markets. It was, in one respect, a boon for U.S. consumers because it added to U.S. inventories and likely restrained gas from eclipsing $10/MMBtu. When the plant returns to service in coming months, it could stir up the markets again. The company has said it expects a partial return to service in November.

“It’s a whole different kind of market turmoil than we have ever seen before,” Braziel said, proceeding to list Russia’s invasion of Ukraine, high commodity prices, Russia’s use of energy as a weapon, recovery from the global COVID-19 pandemic, and the markets dealing with massive energy transition initiatives and the prospect of a recession.

“Our national politics are wacky and producer discipline has basically reset the shale supply curve,” he said. “If that ain’t wild, I don’t know what is.”