Sep 22 / Victor Arduin

Energy Weekly Report - 2023 09 22

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"The rising U.S. production has enabled the country. to become a net exporter. Mexico stands out as one of the most significant consumers of U.S. natural gas, driven by its strategic advantage of readily accessible pipeline infrastructure."

The U.S. Relevance as a Global Supplier of Natural Gas

  • The EIA projects an increase in dry gas production in the U.S. for 2023 and 2024, highlighting the nation's robust capability to supply the world with this cleaner energy source.
  • The increase in natural gas exports from the country is a clear indicator of its increasing importance, solidifying its position as a major supplier for Mexico via pipelines and Europe, through shipments.
  • Europe has a record-high volume of natural gas storage in September, reflecting the mild temperatures on the continent, economic activity slowdown, and high prices that suppressed consumption during the last winter.

Introduction

Natural gas has been one of the most important source of energy in the context of energy transition. In addition to being less polluting than oil or coal, there are many advantages to its usage: there’s ample supply, it’s cheap, it has a high energy content, and it’s relatively easy to move and store.

The significant injection of natural gas into underground storage, in addition to lower-than-expected demand, has signaled a bearish trend in the markets this year. However, this also underscores the strong capacity of the United States to produce natural gas and maintain a crucial role as a global supply player.

Production has seen a consistent four-year upswing, meeting the rise in domestic demand and facilitating exports to both Mexico via pipelines and Europe through LNG shipments.

Image 1: U.S. Working Gas In Underground Storage (Bcf)

Source: EIA

Image 2: U.S. Weekly Change in Working Gas In Underground Storage (Bcf)

Source: EIA

Four consecutive years of surging natural gas production

Despite significant price decreases compared to the previous year, the Energy Information Administration (EIA) projects that both production and demand will reach record highs in 2023. Looking at the numbers, this trend becomes evident. EIA expects dry gas production to rise to 102.69 billion feet per day (bcfd) in 2023 and further increase to 104.93 bcfd in 2024, surpassing the previous record of 98.13 bcfd set in 2022.

Meanwhile, in the first six months of 2023, the United States set a new record for natural gas exports, averaging 12.5 billion cubic feet per day (Bcf/d). This represents an 11% increase, or 1.3 Bcf/d more than during the same period in 2022. The agency forecast average U.S. liquefied natural gas (LNG) exports would reach 11.60 bcfd in 2023 and 13.15 bcfd in 2024, up from a record 10.59 bcfd in 2022.

Image 3: U.S. Dry Gas Natural Gas Production (Bcf/d)

Source: Refinitiv

The rising U.S. production has enabled the country. to become a net exporter. Mexico stands out as one of the most significant consumers of U.S. natural gas, driven by its strategic advantage of readily accessible pipeline infrastructure. This has resulted in a rapid upswing in exports to the southern neighbor.

According to data from Wood Mackenzie, Mexico's electric power sector has experienced a steady annual growth rate of 3% in recent years. While Mexico successfully bolstered its domestic production in 2022, reducing its dependence on American LNG exports, but this year's demand surge has boosted imports from the U.S. to bridge the supply gap.

Image 4: U.S. Natural Gas Trade Balance (Bcf/d)

Source: Refinitiv

Europe's natural gas consumption was subdued in 2023

In 2022, Europe emerged as the primary importer of LNG from the United States. This shift was driven by a confluence of factors, including elevated international natural gas prices, supply disruptions following a reduction in Russia's pipeline exports to the region, and the expansion of U.S. liquefaction capacity. Together, these circumstances created the ideal scenario for increased European dependence on U.S. natural gas production. In other words, 2022 was very bullish for natural gas contracts.

However, the subdued natural gas consumption this year, influenced by a deceleration in economic activity and milder temperatures, has allowed Europe to meet its storage target well ahead of schedule. In the absence of supply constraints, prices have notably declined since the previous year. Nevertheless, the world is contending with mounting uncertainty regarding potential future events that could disrupt global natural gas logistics. Attacks in the Black Sea, as well as unplanned outages in Norway and Australia, are potential risks capable of driving prices higher.


Image 5: European Gas Storage Levels and Dutch TTF Futures

Source: Refinitiv

Persistent Risks in Logistics and Energy Supplies

The world has witnessed various events capable of disrupting logistics and energy supplies. The COVID-19 crisis significantly impacted global oil transportation, and the war in Ukraine restricted Europe's access to natural gas from Russia. Although the peak phases of these events may be in the past, the lingering risks persist, capable of affecting prices at any given moment.

For example, workers in Australia initiated a strike at LNG facilities due to disputes over pay and working conditions. Australia ranks among the world's largest LNG exporters, serving Asian countries as a major supplier. Any disruption in supply could intensify competition in Asia for LNG shipments, potentially affecting prices in both Europe and the United States.

Meanwhile, Norway's largest gas field is now in its third week of maintenance, and it will experience more significant capacity restrictions than originally anticipated.


In Summary

The increase in natural gas production is crucial for positioning the U.S. as a significant global supplier. This is especially important for Europe, which is facing a shortage of reliable energy options, particularly after the invasion of Ukraine by Russia. The need for dependable energy sources has never been more important.

All of this implies that despite the surplus volume of natural gas in the market this year, leading to lower prices compared to 2022, a single event's outcome could potentially apply pressure on the markets and escalate prices.

Weekly Report — Energy

Written by Victor Arduin
victor.arduin@hedgepointglobal.com
Reviewed by Livea Coda
livea.coda@hedgepointglobal.com
www.hedgepointglobal.com

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