As inventories of natural gas shrink, prices will rise. This gas is typically used to fuel half the homes and businesses in the U.S., heating water for washing dishes and clothes and cooking meals. Demand for it is increasing as natural-gas-fired electricity generation expands.
Demand will continue to be supported by increased gas exports to Mexico, a larger share of U.S. natural-gas production going into the export market, use of it in petrochemical plants rather than pipelined to end-users, and lower imports from Canada (the latter due largely to pipeline capacity constraints). In all, natural gas will increasingly be the home heating fuel of choice.
With more gas coming into the U.S., some gas-fired power plants will shut down or reduce their operations in favor of cheaper coal power. The capacity market for electricity is also shrinking, and prices are likely to continue to rise as other renewables take share from coal without carbon capture and storage (CCS). Gas prices are much higher than for most alternatives, which means that coal is in trouble in the near future.
U.S. gas prices are forecast to rise significantly by the end of this decade and remain high for decades thereafter, based on our analysis of current market conditions, projected consumption growth, and future market fundamentals. In particular, we see three key drivers:
- increasing consumption,
- shrinking inventories at home, and
- growing exports of refined products.
(1) Increasing Consumption: Natural gas consumption is forecast to grow, driven by a number of market dynamics including lower heating prices, increases in industrial and petrochemical demand, and substitution for coal, nuclear and renewable power.
(2) Shrinking Inventories: With increased gas production comes increased export capability through pipeline capacity. At the same time domestic demand is increasing. This will lead to shrinking inventory levels or the amount of gas held in storage compared with the 5-year average.
(3) Growing Exports: The United States has become a net exporter of natural gas due to increasing capacity through pipelines out of the country, largely to Mexico. This trend is set to continue.
Natural gas surged higher, rising for the week.
Natural gas futures traded above $12.68/million BTUs on Tuesday, their highest point since May 12. This marked another big week for natural gas prices as the winter heating season got underway with unusually mild weather across much of the country.
Natural gas prices are expected to increase for a number of reasons. Demand is rising, driven primarily by increased industrial and electricity demand, as well as residential use. New pipeline capacity is pouring more gas out of the country and competition with coal, nuclear and renewables are expected to grow.
Key natural gas markets
Natural gas production in the U.S. has grown over the past few years and is expected to grow even faster by 2020. Growth in natural gas production will have a significant impact on prices because of the relationship between supply and demand. The chart below shows growth in both demand and production as well as natural gas inventories, which are already shrinking.
Natural gas is cheap and abundant. The Energy Information Administration (EIA) forecasts that U.S. gas production will continue to grow over the next few years in large part due to drilling efficiencies and innovations in technology that have made costs lower than anticipated just a few years ago. This is important because domestic consumption is expected to rise significantly over the next few years and natural gas supply growth will be needed to meet demand, especially as coal continues to lose market share due to pollution concerns from burning carbon-based fuels.
U.S. gas prices increase as inventories shrink
The rising price of natural gas on the wholesale market is the result of shrinking inventories. As inventories shrink, which is expected to happen over the next few years, exports can produce more, and imports can be curtailed or shut down altogether for a lack of pipeline capacity to import gas at prices that will cover all costs. The chart below shows recent trends in U.S. production and consumption as well as inventory levels, which are currently very low compared with five year averages and are likely to decline further due to growth in production outpacing demand growth by a wide margin- see comments below chart.
The impact of population growth and consumption. The chart below shows the growing impact on demand of population growth, consumption trends and energy efficiency improvements. The chart shows natural gas consumption as a percentage of GDP increasing 3% to 4% annually over the next decade or so. This increase in demand is one factor that has led to increased gas exploration and development.
