Milan Cacic
October 12, 2021
Money Economy Commentary Trending Weekly updateNATURAL GAS PRICES, HOW HIGH CAN THEY GO?…
We've had quite a few questions regarding natural gas prices and their potential direction and price. I hate to use the term “it is different this time" but the reality is that it is different this time. In previous gas cycles, North America has been an island that produced its own natural gas and consumed its own natural gas without any exports or imports. Today, we export 10 BCF per day with another two trains of LNG coming on in the Gulf for the end of the year. We will be exporting 12 BCF per day all over the world! This represents approximate 15% of North American production. Why does this matter? It allows world pricing for natural gas to filter into North America. This is not something that’s happened before.
So, how high can natural gas prices go? Recently natural gas prices in the UK have been as high as $30 per MMBtu. North American natural gas is currently priced at approximately $6 per MMBtu, which is an increase of $2 compared one year ago. Normally, when prices go higher, producers increase spending, and supply goes up very quickly to meet the demand. It appears that the heavy government regulations with regards to new large projects, combined with ESG concerns and labour shortages are creating the perfect storm to keep new supply from entering the market. Most large oil and gas producers seem content to pay their free cash flow back to investors as a dividend or buy back their shares instead of growing production.
To make matters worse, current storage levels in North America are 15.4% below last year’s level during the same period [US energy information Administration]. If we have a warm winter, prices will probably stabilize or even go down. However, if it's a cold one, your guess is as good as mine on how high natural gas prices may go. It might be a good idea to get some firewood ready!
I've also included a piece from our CIBC Economics Team entitled "Some crude remarks on Canada".
As always please give us a call if you have any questions.
Have a great weekend.
Milan