Not All Commodities Go Down: The Whac A Mole Inflation Game.
by Wolf Richter for Wolf Street.
here we go again. This morning, the notoriously volatile natural gas futures contract, which has stalled many hedge funds over the years, jumped to nearly $10 per million British thermal units and is currently trading at $9.75, the highest since July 2008, up 146%. than last year, and up 350% from three years ago, overtaking a string of hikes that began in early July, just when people got used to lower prices for basic commodities.
The price has now regained all of its low that started on June 8, when a fire destroyed and shut down the Freeport liquefaction plant in Texas, reducing LNG export capacity by 17%. The plant is due to resume exports at partial capacity in October. The damaged part of the plant will take longer.
The closure of the LNG export facility removed some demand from the United States, and the drop in price was a classic, unexpected backlash that has now been phased out. Since its lowest point on June 30 ($5.39), the price has increased by 81%:
The drop in natural gas futures prices in June and July was one of the reasons cited due to inflation in the US rising to a peak. Natural gas piped to homes accounts for about 1% of the total CPI. In the July CPI reading, utility-to-home gas fell 3.6% from June, the first monthly decline since January, and a welcome dip after gains in previous months, including +8.2% in June from May. , and +8.0% in May from April.
Sharp rises in futures prices do not immediately translate into higher natural gas prices at home, but they do happen eventually. This is another example of the Whac A Mole inflation game, where price spikes are popping up here and there again.
Natural gas also fuels electricity prices through power generators, into food prices through fertilizers made from natural gas, and into prices for all kinds of other products.
The two-year hike in natural gas prices was supported by US LNG exports, which were booming New LNG export terminals come online one by one – seven since 2016. A small LNG terminal in Kenai, Alaska, has been in operation for years. LNG exports have increased the demand for US natural gas and increasingly linked US natural gas prices to global LNG prices.
For natural gas power plant operators, who are struggling to meet demand for air conditioners, the hit to natural gas export capacity this summer came at just the right time, and the drop in natural gas prices over the summer was a godsend. But this is over now.
LNG exports have been on the rise since 2016. The United States also exports natural gas via pipeline to Mexico and to a lesser extent Canada, but these pipeline exports have been roughly flat over the past few years. What added new demand on a large scale in the US are LNG export terminals.
The Energy Information Administration released LNG export data through May, which does not yet include the potential drop in exports in June and July due to the shutdown of the Freeport LNG terminal. June export data will be released at the end of August:
But even at today’s price, natural gas futures are much lower than they were during the spikes in 2005 and 2008, and a bit higher than they were in 2000. At the time, there was talk of a shortage of natural gas and LNG terminals being built. Import to import expensive LNG into the United States.
This incident was followed by a fracking boom, which turned the United States into the world’s largest producer of natural gas, causing natural gas prices to collapse in the United States, and leading to bankruptcy court for many of the largest natural gas fracking units, including the Chesapeake.
Now the US natural gas market is linked to global markets through extensive export terminals that eliminate much of the price difference between US natural gas prices and international LNG prices. Welcome to the old and new world of high natural gas prices.
In light of this, the price of natural gas today in the United States is not that extraordinary, and is still much lower than in other parts of the world:
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