Natural Gas Edges Toward Shortages?

Dr. Ken Rietz

The US is the world’s largest producer of natural gas, with its annual production larger than its consumption, and consistently larger each year (with a slight pullback of less than −0.10% in 2022). (See EIA production and EIA consumption.) Those tables indicate that production is 116.54% of consumption for 2023, amounting to a surplus of 5.376 million cubic feet, or 152.2 billion cubic meters. With that type of surplus, it seems very unlikely that natural gas in the US would be even close to suffering any type of shortages any time soon. Yet that is exactly what Reuters hints at gently and Pipeline & Gas Journal (even within the same article) more forcefully suggests could happen in the near future. That is what we will look into this week. First, we look at the prices of the front month futures contracts for US natural gas. The gentle decline in (already historically low) prices is due mainly to the increasing surplus.

Figure 1: The NYMEX front month natural gas futures, in USD

The center of the situation is the construction of at least one very large LNG terminal in Canada. Supplying that terminal will obviously reduce the amount of natural gas that Canada exports to the US. The very fact that Canada exports any natural gas to the US might seem odd, but the fact is that in 2023, they exported an average of 8 billion cubic feet per day to the US, up slightly from the prior five-year average of 7.5 billion cubic feet per day.

The EIA gives nearly 2.5 trillion cubic feet of natural gas in working storage, which would be depleted in more than 300 days to replace the natural gas from Canada at the current rate of import to the US. In other words, this is not something to worry about in the immediate future. This remains true even though Canada is also thinking about building more LNG terminals, since they typically take two to five years to build. Even the floating terminals will take at least six months.

Currently, there is a pause on the construction of new LNG plants in the US. The EIA’s projections for LNG exports are for a 3% increase in 2024. A similar projection in 2025 is for an 18% increase. This might suggest that the EIA expects the pause to be resolved soon in favor of more LNG terminals. (Of course, no explicit statement to that effect has been made.)

The outlook for natural gas prices generally tends downward for a while. This is in part due to the pause in US LNG terminal construction, in part due to the massive stockpiles of natural gas, and in part due (again, according to the EIA) an expectation that drilling technology will be able to cause the supply to grow at least as fast as demand grows, such as would happen with more US LNG terminals.

To answer the implied question in the title of this commentary, it is likely that there will be no shortage of natural gas in the near future. However, it is always prudent to take heed of credible warnings, so watching the reserves of natural gas as well as its imports and exports is strongly recommended. A simpler, and almost equally effective, alternative is to watch the price of natural gas. The futures prices are the experts’ estimates of that. The 3, 6, and 12 month futures (Aug24, Nov24, and Jun25) for natural gas are (in USD per million BTU) 2.575, 3.017, and 3.209. None of these would indicate a serious shortfall in US natural gas supply.