Frigid arctic air has brought extreme cold and winter storms across much of the United States, leading to surging demand and reduced supply for natural gas. Prices have skyrocketed to unprecedented highs in some regions, while longer-term futures prices have retreated on expectations of warmer weather ahead. The wild price swings reveal vulnerabilities in the US gas market.
Demand Shattered Records During the Deep Freeze
As temperatures plunged below zero degrees Fahrenheit, gas demand soared to all-time highs in many parts of the country. The Southwest Power Pool, which oversees the electric grid across 17 central and western states, reported an new winter peak record for gas-fired generation during the week of January 15th . New England also set winter record, consuming over 4.5 billion cubic feet per day as heating needs jumped .
Several factors drove the surge in consumption:
- Extreme cold weather increased heating demand from residential and commercial customers
- High heating demand also impacted the electric power sector, which relies on gas to fuel peaker plants
- Low wind generation in some regions forced greater reliance on gas plants to meet electricity demand
The scale of demand far exceeded anything seen in years prior during typical cold snaps. With supply limited, prices exploded to unprecedented levels.
Natural Gas Prices Reached Astronomical Highs
In multiple regional hubs across the country, natural gas spot prices rose to extremes during peak cold periods. Some notable markers include :
- Southern California hub: over $60/MMBtu on January 18th
- Chicago hub: above $40/MMBtu on January 15th
- New York hub: exceeded $20/MMBtu on January 15th
Such price levels would have been unthinkable in past winters. Compared to the year prior, Southern California gas was 10 times higher, while Chicago and New York experienced 4-5 fold increases week-over-week.
|Natural Gas Spot Prices
|Week Ending Jan 13, 2023
|Week Ending Jan 15, 2024
In addition to regional hubs, the benchmark Henry Hub price also reached its highest level since 2019, briefly rising above $10/MMBtu. Such pricing dynamics reflect the broad scale of exceptionally high demand across most US gas markets.
Output Disruptions Compounded the Supply Crunch
While the frigid weather created sky-high demand for natural gas to heat homes and businesses, icy conditions simultaneously hampered efforts to extract and transport supply. The harsh cold caused freeze-offs or complete shutdowns at gas wells, sharply curtailing production volumes.
Output in the Permian basin fell by over 2 billion cubic feet per day (Bcf/d), a 10% drop in the prolific shale play. Supply from the Haynesville shale declined a similar amount on a percentage basis. Nationwide, gas production slid by an estimated 12 Bcf/d due to the cold weather issues .
Compounding matters, icy conditions on the Gulf Coast disrupted loading operations at LNG export facilities. The loss of liquefied natural gas cargo shipments eliminated another key source of gas demand, helping counterbalance deficits in other areas. But it removed upward pressure on prices as global LNG buyers compete for US supply.
Already reduced wellhead output struggled to reach end users due to freeze related problems on pipelines and distribution systems. The winter storms demonstrated how vulnerable US gas infrastructure remains to extreme cold. With market fundamentals tight coming into the winter, the perfect storm of soaring demand and hampered supply availability sent prices skyward.
Futures Markets Retreat on Warming Expectations
Even as spot prices for immediate delivery set records in parts of the country, futures contracts for February delivery and beyond moved downward. While the extreme cold shot spot prices to unprecedented levels, warmer weather forecasts for late January and February precipitated a pullback across forward curves.
Both short-term futures on the New York Mercantile Exchange (Nymex) and longer dated contracts on the Intercontinental Exchange (ICE) shed value on the likelihood of moderating temperatures. The Nymex February contract dropped from nearly $5/MMBtu down below $3.50/MMbtu over the second half of January. The Cal 2024 ICE strip, setting prices for each month over the coming year, sank from above $4.15/MMbtu down close to $3.75/MMbtu .
Futures markets reflected bearish sentiments about fundamental loosening over the rest of the winter. While the arctic blast strained the system nearly to its breaking point, projections for a less frigid end of winter and early spring shifted price outlooks downward. The extreme volatility nevertheless injected even more uncertainty into the natural gas landscape.
Lasting Impacts from the Polar Price Swings
The wild gyrations in natural gas prices over the past weeks could imprint lasting changes on US gas markets. Despite pullbacks on the horizon, the astronomical spot prices may lift pricing benchmarks over the longer run. Expectations for recurring cold blasts may also bolster risk premiums more structurally.
Ultimately the extreme winter unveiled crucial infrastructure weaknesses that leave end users exposed during periods of peak demand. As climate change potentially increases such severe weather risks, the natural gas sector likely needs major investments and reform to gird against future polar vortices. The country’s grid resilience and energy affordability may depend on decisive measures to winter-proof natural gas systems after this brutal cold snap.
So in summary, the extreme cold weather created unprecedented natural gas demand while hampering supply infrastructure. Prices in various regional hubs shot to extremes as a result. But futures markets have retreated on warmer weather forecasts. The gas grid weaknesses revealed during this cold snap may necessitate substantial hardening investments and other measures.