The Great Convergence: US Gas Markets Set for a Transformation
U.S. natural gas prices have remained at remarkably low levels for years thanks to the abundant hydrocarbon resources unlocked during the Shale Era.
International prices however have been much more volatile and sensitive to geopolitical events and fundamental shifts in the global market. The U.S. is largely shielded from this kind of exposure.
After over a decade of this pricing discrepancy between the U.S. and international gas benchmarks, the natural gas markets are poised for a Great Convergence.
As these markets become more interconnected, could we expect US prices to finally align with global gas fundamentals?
Or will US consumers continue to enjoy the benefits of the country's abundant natural gas reserves?
The Great Divide
Relatively speaking, U.S. natural gas prices today looks as if it'll turn negative pretty soon while global gas prices remain extremely volatile.
HOWEVER - This pricing regime is set to transition from a state of divide, to a state of convergence.
For over a decade, natural gas in the U.S. (we'll use the liquid Henry Hub benchmark here) has traded in a world of its own compared with international benchmarks like JKM and TTF.
International premiums have historically been elevated, but only until the global gas crunch in the wake of a sharp COVID demand rebound did prices these benchmarks soar.
All while Henry Hub remained relatively timid.
This price reaction (or lack thereof) by Henry Hub is a result of year of abundant, low cost natural gas supplies unlocked during the shale era beginning circa-2008.
This vast influx of gas supply occurred during a period the U.S. was ramping up LNG import facilities!
Domestic production was more than enough to fulfill demand. So all of a sudden, there was no longer a need for LNG imports.
A gas glut had emerged with no outlets to alleviate the shale-induced bottleneck.
LNG operators had no choice but to turn a complete 180 and transform their import facilities into export facilities. The prime example of this being Cheniere Energy in 2009, which struggled to gain the trust of overseas parties willing to enter long-term agreements for the delivery of U.S. natural gas. Production from shale was just getting started, and investors needed further confirmation of its sustainability before allocating billions of dollars towards this infrastructure.
After the initial idea in 2009 for Cheniere to flip its facility to handle exports, it eventually secured funding and shipped their first LNG cargo out of the U.S. in 2016.
It took seven years for the idea to come to fruition.
Other LNG operators followed, and as they secured off-taking contracts from overseas, the natural gas bottleneck that built up over the years was slowly being relieved.
This led to a brief period of price convergence across U.S. and international markets.
But with oil-producing shales getting gassier, and natural gas demand beginning to flat-line, the situation at home has only gotten worse.