When US natural gas was last this cheap, President Gerald Ford had just assumed office and pardoned his predecessor Richard Nixon. Even in the pricier European and Asian markets, prices are below late-2021 levels, when the Russia-induced crisis began. This glut of bargain-basement gas might be a blip, but foreshadows a reshaping of the industry.
Prices of the Henry Hub benchmark are hovering just above $1.50 per million British thermal units (MBtu), or less than $9 per barrel of oil equivalent. Correcting for inflation, they have never been this low over a month since Henry Hub started trading in 1989, and national-level annual average prices have not been below $1.50 since 1974. And this is in winter, when prices usually soar as people fire up their gas boilers.
In the world beyond the US, liquefied natural gas (LNG) in the key north-east Asian market is down to $8.30 per MBtu, the lowest since April 2021. Europe is nearly through the high-demand winter period, its inventories are high for the time of year and should start refilling in early April. Prices at the key hub in the Netherlands are their cheapest since May 2021.
If you had asked an analyst before 2022 what would happen if Russian gas to Europe were almost entirely cut off, followed by a crisis in the Red Sea forcing Middle Eastern LNG to take the lengthy route around Africa, they would have predicted catastrophe.
In 2022, Russia’s cut-off of supplies to Europe sent international LNG prices to stratospheric records of $100 per MBtu, and even the more sheltered US market touched $10. Today’s sanguine situation seemed unimaginable a year ago.
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A confluence of factors has created this price slump. A mild Northern Hemisphere winter, influenced by the El Nino effect in the Pacific, has reduced the demand for heating. European consumption is well down, because of the closure of energy-intensive industries under the price pressure of the last two years, and greater renewable output replacing gas-fired power.
And US production has been extremely strong, led by the mighty Marcellus shale of the North-east, and the associated gas from oil drilling in the Permian Basin of Texas and New Mexico. That American output in turn finds its way to world markets via a growing fleet of LNG export facilities. When one of these stops operations – as the Freeport plant in Texas did in January because of damage from a cold weather snap – gas is trapped in the US, pushing down prices there.
Extremely low prices will not persist. They encourage higher demand: US gas consumption for power generation is on the up. European consumption may also rebound if some industries restart operations, while bargain-hunting users in China, India and Thailand are snapping up LNG cargoes.
They also restrict supply: US shale companies reduced drilling by more than a fifth last year.
Chesapeake, which is in the process of concluding a merger with Southwestern to create the biggest American gas producer, said on Wednesday it will cut its planned output this year by about 30 per cent. As in the oil patch, more mergers are likely as companies seek to save costs.
Geopolitical concerns still loom. The residual Russian gas supplies by pipeline to Europe are likely to stop at the end of this year, when a contract for transit via Ukraine expires. The pause on new LNG export approvals, announced by President Joe Biden’s administration last month, could cut additional supply in the later 2020s. And there is no guarantee that next winter will be warm.
Nevertheless, even low-ish gas prices will have profound effects. From 2026 and 2027 onwards, a wave of new LNG supplies will wash over the world market, mainly from Qatar and the US. On Sunday, Doha announced a further massive expansion of export capacity by 2030. US LNG exports will nearly double by 2028 on last year’s levels. That may pull up American domestic prices, probably moderately, but it will further ease global prices.
The world LNG market tends to transform when it is glutted. Contracts linked to oil prices, a relative safe haven in 2022, will come to seem very expensive versus those based on traded gas markets. Sellers will have to offer more flexible contract terms, LNG will move around yet more in search of customers, and there will be a big effort to open up new markets, particularly in south and South-east Asia and perhaps Africa. Cheap gas is necessary to compete with coal in countries such as India and Indonesia.
On the other hand, developers of some of the higher-cost or riskier LNG export projects, particularly in Africa, may think again. As a recent study from the Columbia Center on Global Energy Policy outlines, Russia faces the prospect of higher costs for new export infrastructure, combined with lower prices as it loses its traditional European market in favour of China.
A soft gas market might encourage Europe to break its final dependence by banning Russian LNG imports, as it has already done for oil. Beijing, with plenty of options for competitive LNG supply, signed several major long-term deals with Qatar last year, and is well-placed to drive a hard bargain with Moscow for new pipelines.
Other features of the market are changing too. Warmer winters, hotter summers, decarbonisation in Europe, and economic growth in the tropics and subtropics mean that demand in the Northern Hemisphere winter will fall relative to that in summer. The historic pattern of dramatic increases in demand and prices during winter should soften.
On the other hand, the loss of flexible Russian supply, which historically ramped up in winter, acts in the opposite direction. There will need to be more effort to pair winter-peaking LNG importers such as Europe and Japan with summer-peakers in the Middle East and south Asia.
Heatwaves, cold snaps, droughts, which cut output from hydroelectric and nuclear plants, and periods of still weather with low wind power output, will create even more volatility than they do today.
The resilience of the global gas business in the face of the shocks of 2022 has been remarkable. The market is still fragile and could be upended by extreme weather or further supply disruptions. But if these don’t come about, years of cheap gas will upset a lot of calculations by sellers, governments and consumers.
Robin M. Mills is chief executive of Qamar Energy, and author of 'The Myth of the Oil Crisis'
