Nat Gas, LNG, and the Need for Alternatives to Russian Pipelines

IN THIS PUBLICATION:

• The U.S. might be one ill-timed hurricane away from having major reductions in its ability to export LNG just as Europe is trying to reduce its energy dependence on Russia.
• European demand for LNG will likely drive prices sustainably higher in the long-term, especially if the U.S. bans exports to protect the U.S. consumer.
• That said, a technical correction in Natural Gas prices could continue until China officially re-opens from lockdowns and inflation is under control (which may take a while).

Globalization vs Geopolitical Interests

In 2020, natural gas prices declined to multi-year lows as the world shut down due to COVID-19. U.S. Henry Hub prices averaged $1.99/mmBTU – the lowest since 1995 – while Asian LNG prices declined to their lowest level on record ever. As a result, the EIA’s global outlook for 2021 concluded that “natural gas prices will remain low compared with historical levels.” The more venerable IEA was a little more circumspect, concluding that it would take until 2025 (at least) for natural gas demand to recover.

Instead, even before Russia invaded Ukraine, prices were already moving higher.

Where do we go from here?

• Is natural gas going to settle back down into a longer-term decline in prices as everyone rushes to build LNG infrastructure to capture the bumper profits?
• Or is this only the beginning of yet another leg-up in not just natural gas prices, but across the energy spectrum?

Our brilliant friends over at Goehring & Rozencwajg think the answer is the latter, arguing persuasively in their Q1 2022 commentary that “The Gas Crisis is Coming to America,” which would have systemic global implications. Our other brilliant friend Marko Papic over at Clocktower Group concurs with G&R – international gas prices could go up “four-to-six fold.”

Before we can tackle what is going to happen next, however, we need to spend some time understanding how we got here. (What, you thought you’d get through a Jacob Shapiro piece without some historical context?) In particular, we need to understand the way that the Shale Gas Revolution and the LNG Revolution fundamentally changed global natural gas markets in the mid to late 2000s as what is happening in markets right now is intrinsically tied to the combination of those developments. An unstoppable object (the globalization of natural gas supply) is destined to crash into an immovable force (the geopolitics of energy security in a multipolar world) – and we all know I’m biased to say the latter will win the day.