Highly pressurised natural gas

A perfect storm is a pretty little cliché to describe what happens when a host of bad things gang up and arrive together on your doorstep at the same time. Most markets are used to, and can handle, one or two bad things happening at any given moment. The problem for the gas market, and the consumers and businesses that rely on it, is that a host of bad things have arrived at the same time, especially after the 18 months that we have endured since Covid-19 reared its ugly head. The knock-on effects could make for a very uncomfortable winter, suggests Kay Rieck, an experienced market observer and investor.

Natural gas has been a subject of serious discussion in recent years. Gas is an abundant resource in the US and the country has been a net exporter for some time. In theory, supply should not be tight, but there are several reasons why it is.

The causes

The first cause is simple: the weather. The summer was exceptionally hot in the northwest, which meant that air conditioning units were running longer and working harder. This in turn meant that stocks of natural gas, usually built up during the warmer months, are significantly lower than they usually are at this time of year. Coupled with this, last winter was particularly harsh in Europe and Asia, meaning that they have been more active than usual in the global gas markets replenishing their stocks. As a result, prices start to rise.

Secondly, as I have discussed in several articles recently, the oil and gas sector has had a torrid time during the pandemic. The supply chain that delivers natural resources has evolved over a century to be very efficient during the normal course of events. But we’ve been a long way from there for more than 18 months. Demand for oil evaporated during the early phases of the lockdown, which had significant ramifications for the extraction of natural gas. Demand for oil recovered, picked up speed, it started to look like 2021 might be a fantastic year and then collapsed like a souffle when the delta variant started to curtail economic activity once again.

Thirdly, there’s the knock-on impact of Hurricane Ida, which has meant that three quarters of gas production in the Gulf of Mexico is offline three weeks after it started to gather momentum at the end of August. It doesn’t sound like much but it adds to the impact of the other factors.

Then there is the growing demand from crypto currencies, which rely on servers to complete their calculations. These servers have a voracious appetite for power, and with China’s decision to clamp down on crypto over the last few months, activity has spread out across the world, increasing demand for gas.

Meanwhile, there is the US role as a global exporter of natural gas which unfortunately means that suppliers have contracts that they are expected to fulfil with other parts of the world. And demand in export markets has also been struck by unpredictable events. Britain, for example, has suffered a major fire in one of the pipelines that brings gas over gas from mainland Europe, at the same time as the country has suffered a relatively low-wind summer which has reduced the effectiveness of its windfarms and forced it to dip into its gas reserves.

Which brings us neatly to the final factor: energy transition. There has been a lot of focus on decarbonising economies over the last few years and natural gas has been identified as a transition fuel that can help achieve this ambition. As gas has become the fuel of choice for more and more activities, demand has risen, and, in the nature of the markets, prices have gone up.

The interesting thing of course is that the Biden administration has stated its ambition to move to more and more energy coming from renewable sources over the next few years. According to an article from CNBC, the White House recently stated that it wants to ensure that nearly 50% of the energy consumed in the US comes from solar by 2050. This will be an impressive achievement given that solar currently contributes around 3% of the power supply.

No one thing to blame…

In a normal year in normal market conditions, any one or two of these factors would be met with a shrug and prices going up by a pip or two. It’s the fact that they have all come at once that is causing the massive price increases that are being felt across the board at the moment.

And the big challenge is that the US is that fall has not yet made its presence felt. If there is a particularly bad winter, or if winter arrives early and gives the suggestion that it will be a long one, the pressure on prices is likely to continue to increase, which will have a knock-on effect across several industries that rely on natural gas or its by-products.

…but perhaps it’s time to make some changes

As we have learned several times over the last couple of years, our just in time supply chains are phenomenally efficient when most things are working well, but it does look like we will need to develop ways to make them more resilient.

Technology is likely to play a key role in this, giving us the ability to understand the demand cycle more clearly and manage the supply side more efficiently. An honest and open dialogue between the various parts of the sector as well as regulators is also likely to help. Relationships have been complicated in recent years by some of the ways that the natural resources industry have responded to the potential for change. Some of this has been politicians of various hues taking any statement made by any part of the industry and twisting it to fit their particular world view, but the industry needs to be clearer that it understands how the world is continuing to change and make sure that it has the flexibility to adapt to this changing world.

Three years ago, if anyone at a conference had proposed that the industry was at risk from a confluence of events like this, they would have been laughed off the stage. Now it would just be nice to go to a conference.