U.S. Natural Gas Is Seeing Another Boom

At a Glance

  • Demand for U.S. natural gas rises as Henry Hub becomes global benchmark

Florida temperatures were colder than normal in the first weeks of 2018. Houston hit its lowest temperature in more than two decades.  It should be no surprise, then, that demand for natural gas began the year higher than usual in the United States. Drawdowns of U.S. natural gas supply expected to be 319 billion cubic feet (bcf) wound up at 359 bcf in the first week of January, which helped send prices higher.

But as temperatures have warmed in February across the U.S., reaching record highs in some places, gas drawdowns have continued to climb above the average. For the week ended Feb. 9, the EIA reported a drawdown of 194 bcf, about 26 percent above the five-year average for this period.

This underscores the fact that, in today’s gas market, it’s not just about weather.

Supply and Demand

Although the U.S. production has increased roughly 20 bcf/day over the past five years, the overall consumption and natural demand has increased as well.

The extra push on natural gas demand comes from a confluence of three factors. The first of these is obvious: the cold blast that hit most of the U.S. to start the year.

Matched with that is a movement toward clean energy. Coal production is being retired in many areas, and gas is increasingly used for power generation. Facilities that used to rely on coal are now looking to the vast supply of cleaner and more cost-efficient energy, natural gas.

Lastly, the emergence of liquefied natural gas (LNG) as a solution to supply issues outside the United States, primarily in Asia and Latin America, is drawing on U.S. gas that was once solely for domestic use. Roughly 2.5 bcf/day of LNG is exported creating an additional inventory pull on the U.S. supply.

As a result, Henry Hub Natural Gas futures — long the benchmark natural gas price for the United States — has become a global price indicator. More than one million Henry Hub futures contracts were traded in a single day for the first time in January, and overall futures and options trading in Henry Hub had a record month.

The Market Response

The growth in trading volume makes sense. With the rise of LNG, more market participants have exposure to Henry Hub Natural Gas prices, and those participants need to hedge their exposure. The LNG factor is not a short-term phenomenon either. Overseas participants buying LNG are signing long-term agreements, many times 20-year deals, which means they are — and will be — affected when demand rises or falls, and the market becomes volatile. This trend started to show in 2017, when 25 percent of trading in Henry Hub futures occurred during Asia and European trading hours (6 pm to 6 am Central time).

As natural gas production in the U.S. has climbed upward and LNG exports continue, trading outside the U.S. will be an important factor to watch in measuring the global interest in U.S. natural gas.

Neil Somma is Executive Director of Energy Products at CME Group

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