2021 Natural Gas Price Run-up

Domestic and international natural gas markets were turbulent throughout the later part of 2021. Daily gas prices at Henry Hub began a steady run-up from $2.75 per MMBtu in mid-June to $6.00 in early October, before easing off to $3.50 by mid-December. Following the start of the COVID-19 pandemic in March of 2020, in the US, natural gas and oil commodity prices were low and production slacked off. In the meantime, demand for natural gas in the power generation and export LNG sectors continued to increase. In February of 2021, a deep freeze event hit the state of Texas and the gas and power system failed, resulting in millions without electricity and heat[1], and a tremendous but brief spike in gas prices.

Outside of major events such as pipeline ruptures or freeze-off events, natural gas prices are driven by fundamentals, or even just the perception of fundamentals. Fundamentals include gas demand and forecasts, gas production and drilling efficiencies, gas storage levels, pipeline capacity, import and export levels, and ease of access to capital for exploration. The long-term fundamentals seem to indicate that the 2021 price run up is a short-term event, however of course, it’s not certain.

The natural gas price forecast is an input for many of the Council’s power planning models, and because of this, the price forecast must be completed early in the planning cycle. For the 2021 Power Plan, the gas price forecast was completed and published in late 2019.[2] The forecast itself is a monthly time series stretching across twenty years and includes a medium forecast series as well as a range of prices defined by a high and low forecast. In addition to the forecast of medium, high, and low prices, a layer of stochastic price volatility is added in the RPM model to evaluate planning under hundreds of gas price futures.

This section will cover a quick summary of recent natural gas fundamentals and a comparison between the forecast and near-term prices leading into the start of the planning period. For a detailed presentation on the subject, please refer to the Northwest Power and Conservation Council meeting in November 2021 which delves into prices and fundamentals data.[3] Here is data that informs the discussion for those who want to delve deeper.

Prices and Fundamentals

A quick summary of prices and fundamentals follow in this section.

The following two figures show the near-term price history at Henry Hub (a national pricing point for natural gas), and a long-term history of prices, in order to gain perspective of the current pricing environment. It’s important to note that even with the price escalation in 2021, the US remains in a low-price environment relative to history.

5-Day Centered Average of Prices at Henry Hub March through December 2021

Natural Gas Price History at Henry Hub by Month 1998 through 2021

Domestic Supply

Natural gas withdrawals from wells in the US declined slightly from 2019 to 2020. The total gas dropped by 166,444 Tcf. (Trillion cubic feet) – which is a 0.4% decline. Production in 2021 has increased though. The EIA provides data through October 2021[4]; the US is on pace to increase by 1.6%, which is 661,365 Tcf.

Demand

Natural gas demand has been steadily increasing in the US, with the power sector the primary growth driver. Total growth in consumption from the residential, commercial, industrial, transportation and power sectors has grown by 8% from 2015 to 2020. In that time, consumption in the power sector grew by 21%.[5]

Storage

The level of inventory of gas that is held in storage for the upcoming winter season can be a key driver in short term prices. Natural gas storage is gas typically held in depleted underground gas or oil fields or above ground LNG tanks near demand centers. Pipeline companies use storage to balance load and manage supply, especially in peak winter heating events, but also during peak summer usage from power generators.

Storage re-fill season for winter typically runs from April thru October of each year. There was an extensive draw down of storage nationally to meet the needs of the winter of 2020/2021. This resulting in a low starting point. Then Hurricane Ida hit the gulf region in late summer. This was a devastating storm which severely hindered gas operations and interrupted storage refills. Piling on to the difficulty of refilling storage there was a big increase in liquified natural gas (LNG) exports to the world market. As late as mid-September national storage levels were 93% that of the 5-year average level for the same time frame (2016-2020). However strong injection rates late in 2021 pulled storage levels back up to near average levels.

Imports and Exports

Overall pipeline imports from Canada have been declining for some time as US shale gas production has come on-line. Though imports from British Columbia and Alberta to the Northwest have remained strong. The big story is in US exports, pipeline to Mexico, and particularly LNG to the world market.

Shortages of natural gas and high prices in Asia and Europe have pulled additional LNG exports from US. There has been significant growth in power generation from natural gas in Asia, cold weather concerns along with geo political conflict in Europe, all the while Brazil is in an epic drought and has lost hydropower output. These issues have placed strong demand on the US for LNG exports and have driven up prices. LNG exports rose 31% from 2019 to 2020, and exports in 2021 are even greater. There is real concern now that the LNG exports are driving up prices for gas domestically. So much so that trade groups are sounding the alarm – the Industrial Energy Consumers of American[6] urged the US Department of Energy secretary Jennifer Granholm to pull back on LNG exports, to help re-fill storage in the near term, but also limit future expected capacity additions.

Annual US Natural Gas Exports

Forecast

The next figures show the comparison of the 2021 Power Plan natural gas price forecast and recent historic gas prices – for Henry Hub and the Northwest pricing hub Sumas. These are expressed in average annual gas prices in $ per mmbtu. Future gas prices are of course uncertain, and the Council periodically updates the forecast. The forecast range appears to be containing the near-term prices to date, but we will continue to watch and will plan to update the forecast before the midterm.

Annual Henry Hub Natural Gas Historic and Forecast Prices