Fall 2023 Energy Market Update

What's happening in the energy markets — and what does it mean for consumers?

Paul Leanza, director of gas supply, and Joe Haugen, senior director of power supply, recently shared an update on what's affecting the markets. Here, we offer highlights from their update — including why it’s important to take a long-term approach to your energy strategy.

Long-term market volatility factors

When it comes to volatility, 2022 was a record year, with 46 trading days featuring a price change greater than 7% day over day. So far in 2023, we’ve seen that extreme price shift on 21 days.

As for what's causing this volatility, several fundamental factors are at play. Let’s take a look:

Production and storage

One of the most significant long-term factors impacting the market is natural gas storage — or lack thereof. In the U.S., we’ve experienced a massive uptick in natural gas production – nearly 40 percent in the last 6 years. In late 2022, production reached 100 billion cubic feet (Bcf) a day, a level we’ve held steadily at for nearly a year. (For comparison, production was at about 70 Bcf as recently as 2017.)

Meanwhile, our storage capacity hasn't increased, leading to an increase in volatility as daily, monthly, and seasonal balancing options have become limited. Storage is the one natural gas asset that smooths out the daily, monthly, and seasonal price swings. Without adequate storage, volatility will continue.

Natural gas exports

In recent years, U.S. exports of natural gas — notably liquefied natural gas (LNG) — have grown substantially. Since 2016, exports of LNG have increased from 0 BCF a day to more than 14 BCF per day. Currently, about 20 percent of the natural gas produced in the U.S. is exported to the LNG market and Mexico. We’re no longer only concerned with regional weather here in the U.S.; now, we must worry about what’s happening across the globe, notably in Europe and Asia. Demand for LNG — and domestic producers' response — is a primary driver of price.

LNG buildouts over the next 3 years may suggest that by 2026 or 2027, demand will outpace supply. But this transitional period will add volatility to mid-term prices. Additionally, the current pipeline and LNG buildouts in Texas and Louisiana suggest that Henry Hub prices could become more linked to global LNG prices — and less linked to the Appalachian area — which will add more volatility to the market.

Natural gas and power generation

As coal retirements continue — there’s been a 50% decrease in capacity in the last 15 years — the power industry is increasingly reliant on gas generation, leading to competition among power generation and heating, industrial usage, and LNG exports. Ultimately, natural gas producers will sell to the highest bidder — power generation. We’re expecting to see power generation gas demands creep up in the winter months as well, leading to even greater volatility in the market.

Ultimately, the price elasticity within the power stack is now limited, and gas cannot rely on coal to bail it out of high prices.

Producer flexibility

Over the last several years, many smaller, independent natural gas producers have gone bankrupt, leading to a shift in the industry as larger, publicly traded companies have become more important players. These larger producers are much slower to react to market conditions and shifts in the supply-demand balance.

Upcoming changes impacting energy prices

Current net supply balances suggest that supply is outpacing demand, but production, weather and LNG exports will have a big impact on pricing outcomes this autumn.

Looking at the natural gas forward curve, we can consider the fair price for natural gas to be between $3.80 and $4.50. The historic price of $2.25 to $3.25 (from 2017 to 2021) now feels low.

So, where can prices go? Given current volatility, the Energy Information Administration (EIA) and other analysts suggest that $9 for natural gas is not out of the question for February 2024. For the balance of 2023 and 2024, the EIA suggests prices will be 5 cents below the current market.

As for the electricity market, the price of gas will continue to heavily influence the price of power, while demand will increase significantly alongside electrification efforts. This is likely to result in higher prices.

Understanding price risks

As we head into the final quarter of 2023, we can expect greater volatility in both the electricity and natural gas markets, due to a variety of long-term factors. It’s important to note that as volatility has shifted to longer-term cycles, hedging terms should also be extended.

For more from our energy supply experts, view our Energy Market Commentary.