The oil sector has been the focus of investor attention after an impressive recovery that has made the sector one of the best performers in 2021. However, it was natural gas bulls who had a real ball with natural gas trading at its highest level since 2014, outperforming oil and many other commodities.
3 Major Trends Determining Natural Gas Use in 2022
The natural gas sector is off to another good start, with natural gas prices (Henry Hub) up 20% to $4.19 a barrel since the beginning of the year thanks to steady demand.
Natural gas prices are up nearly 10 percent in the past few days after updated weather forecasts called for freezing temperatures in the Northeast during January. The forecast comes amid winter storms that hit the East Coast over the weekend, pushing natural gas prices in the city’s Algonquin Gateway up to $24 a barrel. Many New England states have switched to burning oil to keep the grid running during inclement weather because of limited access to domestic gas supplies.
“The heating demand forecast for the [eastern] third of the U.S. improved substantially this weekend and in the last week of January,” said John Kilduff of Capital.
Last week, the U.S. Energy Information Administration (EIA) reported on Thursday that it withdrew 179 cubic meters of natural gas from underground reserves for the week ending Jan. 7, the largest inventory withdrawal this winter.
Low temperatures and high natural gas prices are a boon for major companies such as Royal Dutch Shell (NYSE:RDS.A) and BP Plc. (NYSE:BP), which produce liquefied natural gas in Trinidad and sell it to the New England market. Meanwhile, domestic natural gas producer AnteroCorp. (NYSE:AR) was recently moved to buy in BMO as discounted valuations and rising natural gas prices are expected to drive the stock up 50%, while Chesapeake (NASDAQ:CHK) recently started buying in BAML with ~30% growth.
Wood Mackenzie published his 2022 global gas and LNG report. Here are some of his interesting predictions.
1 Prices will fall if Nord Stream 2 comes online
Severe natural gas shortages, declining wind power generation, nuclear power plant outages and cold weather have left Europe facing one of the worst energy crises in history. Nevertheless, Europe’s energy problems continue to worsen at every turn.
European natural gas prices hit a new record high Tuesday after a pipeline carrying Russian gas to Germany shifted flows eastward, while U.S. ships carrying liquefied natural gas (LNG) destined for the European market headed for Asia, where prices are even higher.
Gas flows to the West through the 2,607-mile Yamal-Europe pipeline, one of the main routes for Russian gas supplies to Europe, have since gradually declined, but have recently changed direction, which the Kremlin says has no political implications.
Some Western politicians argue that Russia is using its natural gas as a weapon in political struggles related to Ukraine and over delays in certifying another controversial pipeline, Nord Stream 2. Russia, of course, denies any connection.
“There is absolutely no connection (to Nord Stream 2), it is a purely commercial situation,” Kremlin spokesman Dmitry Peskov said at a conference call Tuesday.
The Nord Stream project aims to ensure a reliable supply of Russian natural gas to Central Europe. To do so, Gazprom-owned Nord Stream will connect Russia with Germany through pipelines running through the Baltic Sea. Several EU countries have objected to the construction of the pipeline, believing it to be contrary to the organization’s interests.
Woodmac says that at current levels of Russian exports and given normal weather conditions, European storage inventories will fall below 15 billion cubic meters (bcm) by the end of March, a record low. Prices will eventually drop with the end of winter, but storage replenishment requirements will be high, about 20 to 25 billion cubic meters more than last year. The commissioning of Nord Stream 2 may well be the only option for restocking and preventing a repeat of last year’s winter crisis.
“Normal winter weather, including in Asia, and the visibility of Nord Stream 2 commissioning will drive prices down, although storage demand (and high carbon prices) will keep prices above $15 per metric million British thermal units (mmbtu). But cold winters in Europe and Asia, along with continued uncertainty over the commissioning of Nord Stream 2, could lead to further price increases during 2022-be prepared for another bumpy year ahead.
2 Global gas demand will remain resilient
Woodmack says natural gas demand is likely to remain resilient in the short term, with limited signs of demand disruption so far.
Asian LNG demand continues to rise as much of the supply is priced under old oil-indexed contracts and is currently trading at half the price of Asian LNG spot prices. The outlook for the European market is less rosy, as industrial and energy gas demand is down 4% since the summer compared to the past five years.
But Woodmac vice president Massimo Di Odoardo says higher prices will eventually put pressure on demand. In Asia, for example, the rationale for switching from coal to gas will diminish as higher spot prices for LNG will lead to higher contract prices indexed to oil. Meanwhile, investment in renewables and batteries is likely to continue to grow, limiting opportunities for gas demand growth. Policy makers in Europe will seek to accelerate the transition away from natural gas, as the EU’s recent proposal to support biomethane and hydrogen suggests.
3 More natural gas liquefaction projects
Wood Mackenzie predicted that LNG projects will continue to gain momentum as LNG prices are expected to be structurally higher and oil indexation will rise.
The analyst expects a final investment decision (FID) of 79 million tons per year (mtpa) of additional LNG over the next two years, including 33 mtpa in North America, 16 mtpa in Qatar and 20 mtpa in Russia.
Woodmack notes that the big oil companies have so far stayed on the sidelines, but some action is likely in 2022, and some are expected to complete negotiations with QatarEnergy to secure a portion of the Northeast field development.
TotalEnergies (NYSE:TTE) may well acquire a stake in Novatek’s Arctic LNG-1 project, similar to what it did in Arctic 2 and Yamal. And it is also possible that big companies will continue to make takeover deals with third-party projects in North America, both on the East Coast and the West Coast.
Woodmack says natural gas will continue to be the backbone of oil companies’ energy transition strategies, but their ability to invest in upstream and downstream projects is still limited.
Courtesy of the author: Alex Kimani
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