The current boom in unconventional natural gas extraction, largely confined to North America over the past decade, seems poised for continued growth and international expansion in the years ahead. With Asia and Europe expected to utilize natural gas to meet a greater share of their energy demands, while largely lagging behind in the development of their domestic natural gas reserves, the stage is set for imports of the commodity to surge. The August 2014 issue of ZE DataWatch tackles the demand-side dynamics underpinning the future of natural gas markets, in a follow up to last month’s in-depth exploration of the factors surrounding natural gas supply. However, after considering both sides of the market in isolation, it’s worth reflecting on the potential scenarios arising from their interaction.
In the three months prior to September 2014, the World Bank’s monthly average natural gas index dropped by 12% globally, in part due to higher storage levels and consistent streams from existing reserves. This downward pressure has caused prices to sink to $9 USD/MMbtu in Europe, despite geopolitical upheaval; just below $4 USD/MMbtu in North America; and under $16 USD/MMbtu for landed LNG cargoes in Asia. Regular seasonal easing accounts for some of the drop, but price forecasts remain relatively depressed through the winter heating season and into 2015. While this may be good news for commercial consumers, the persistence of this downward trend will have negative impacts on the arbitrage opportunities projected to drive much of the investment in supply over the next decade.
Because natural gas ventures are front-loaded with capital expenses, producers aim to lock in downstream prices that will guarantee project profitability. Historically, these long-term contracts have been linked to the cost of oil, but with that relationship decoupling in recent years, new contracts are more likely to be linked to natural gas spot prices. When the future value of the commodity is not assured to cover initial investments, getting export-driven natural gas projects off the ground obviously becomes much more difficult. But, if demand for natural gas continues to grow beyond projections in Asia, it could outpace the buffer of existing spare capacity and ultimately drive prices back to a level at which new project development is economically feasible. The issue then becomes the lead time for bringing these new projects online, and the markets could face a stretched situation where tightened supply drives natural gas prices to surprising new heights.
Another potential scenario could start with a repeat of the exceptionally cold winter seen this year. Depletion of storage inventories thought to be sufficient would lead to an unexpected rise in natural gas prices. This would leave producers flush and ready to make new investments, at the same time spurring the lock-in of contracts from commercial and industrial consumers caught wrong-footed. These conditions would likely enable firm commitments and ground-breaking on the numerous natural gas export projects on the west coast of North America, as well as in Australia and Central Asia.
The real question is: if exceptional seasonal peaks in demand become the norm, and producers respond by escalating already above average volumes of storage injections, will prices resume a downward spiral? Prospects will only be further weakened by the glut of new natural gas sources coming online. It is not clear that even an engine of growth like China or India could construct import facilities and new generation sources fast enough to absorb this excess supply, especially if unstable natural gas prices make sticking with coal or investing in renewables seem like a more cost-effective solution.
In the short term, both sides of the natural gas market are relatively inelastic – that is, shifts in price don’t have a dramatic impact on supply and demand. However, over a larger time frame, whether or not more players enter the market, both producers and consumers can and will change their behavior. It’s essentially impossible to forecast the equilibrium of future prices with certainty when so many factors are involved in this interaction. The only real certainty is that prices and projects in the natural gas world will experience vigorous volatility along the way.
Here at ZE, we collect natural gas data from diverse sources, including data from the World Bank, Platts, Argus, ICE, and NYMEX. To learn more about how our award-winning software, ZEMA, can address your data challenges, book a complimentary demo with us.
 “World Bank Commodities Price Data (The Pink Sheet),” World Bank, September 2014, accessed September 18, 2014, http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1111002388669/829392-1389028647906/Pnk_0914.pdf.
 “EIA Short-Term Energy Outlook,” U.S. Energy Information Administration, September 2014, accessed September 18, 2014, http://www.eia.gov/forecasts/steo/report/natgas.cfm.
 Starlinger, T. and Tamara Karlovsky, “Decoupling and Where is the Gas World Coming To?”, Who’s Who Legal, June 2013, accessed August 15, 2014, http://whoswholegal.com/news/features/article/30573/decoupling-gas-world-coming-to.