The natural gas market has changed due to new forces.
The deregulation of the natural gas markets took place 35 years ago. The use of natural gas as a fuel source and a product that can be exported to other countries has increased dramatically throughout that time. Natural gas prices are influenced by a number of factors on a daily basis, but two primary ones that have changed recently are the US winter weather and the expanding LNG commerce with Europe and Asia.
Just consider the enormous impact that Winter Storm Uri in February 2021 had on natural gas prices, which were trading at multiples of 30, 40, or even 50 times. Another blow to US natural gas prices came with the outbreak of the Russian-Ukrainian conflict last year, when Europe was left exposed.
Almost all commodity procurement teams strive to achieve three main objectives: staying within budget, simplifying the market, and making informed selections based on credible information. Here’s how StoneX’s risk management experts handle the weather-related uncertainty that precedes the December to March period and the estimated growth in LNG shipments that will approach 50% over the following five years.
Wintertime conditions
The impact of lower temperatures within a three-to four-month interval can significantly boost household heating demand, even while global temperatures are still rising on an annualized basis (2023 will be the warmest on record). Concurrently, the majority of US natural gas production has shifted from the Gulf of Mexico to onshore due to the introduction of shale drilling. Production freeze-offs in the Northeast are put in danger by the continuous development of shale gas. This is a double-edged sword: although manufacturing freeze-offs lower supply, lower temperatures raise demand for heating.
Exports of liquefied petroleum gases
The US’s LNG exports were essentially nonexistent seven years ago. The United States will be among the top three global LNG exporters in 2023, along with Australia and Qatar. By the end of the decade, LNG exports are predicted to increase from their present rate of approximately 14 BCF/day to 22–27 BCF/day. That is the daily amount of natural gas that exits the US. The growing trade disputes between nations will only increase the number of purchasers entering the US LNG market.
Tools for managing these two different types of risks
The supply of natural gas purchased during the summer is stored underground to help meet peak demand requirements, as it is known that daily production of natural gas during the winter is insufficient to meet demand. A good risk manager will attempt to use call purchases for a set premium or fixed-price purchases made prior to winter to protect the high-volatility months. When these two hedge strategies are combined, there is protection against weather-related price surges and some downside participation in the event that temperatures stay warm.
The weather is hard to anticipate, but over the next five to seven years, LNG shipments will expand linearly, which is more predictable. A excellent strategy to remain ahead of the market is to secure a portion of future years’ predicted consumption below the average historical prices, using a methodical hedging matrix that defines “Value” (average over time).
At StoneX, we assist our clients in utilizing the financial and physical resources available for more precise long-term hedges while being proactive with their hedging objectives in a shorter timeframe (the approaching winter). A procurement team can use structure and unambiguous assistance to make confident judgments about commodity purchases by adopting a disciplined approach to weather and LNG export price concerns.
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