5 factors affecting North American natural gas markets this winter

North American natural gas markets are influenced by a complex web of factors, from production levels, storage capacity and power market dynamics, to gas imports, LNG exports and weather patterns. So, what factors are likely to be decisive in the coming season? 

Our experts recently presented a webinar to offer their analysis of the outlook for North American natural gas markets in Winter 2024. Fill out the form at the top of the page to download the slides from the event, or read on for a quick overview of five key factors we expect to be play an important role. 

1. Gas production decisions could create deliverability issues 

A relatively new feature of North American natural gas markets is the proactive management of supply levels, with producers either delaying the ‘turning in line’ (TIL) of newly drilled wells or turning existing wells on and off. Two firms have pioneered this approach, namely EQT and Expand Energy (the new name for Chesapeake Energy following its recent acquisition of Southwestern Energy).  

The responsiveness of production to market price signals effectively turns production into synthetic storage from a supply-demand perspective. Though seen to a limited extent in previous years, it has become much more common in 2024 and will be a continuing source of market volatility this winter. 

2.Renewable capacity growth will determine how much gas demand for power grows this winter 

Another relatively new phenomenon in North America is the increasing volatility in demand for gas to produce electricity. Gas demand for power generation hit 58 billion cubic feet per day (bcfd) over the summer as cooling loads peaked – well over half of total US natural gas production of just over 100 bcfd. However, it’s not just summer demand that’s increasing – last winter saw demand peak at a record 44 bcfd.  

This demand depends on a range of factors, including overall load growth, retirement of coal-powered plants, and low gas prices incentivising coal-to-gas switching. However, a key reason for the scale of these surges in demand is the growing proportion of renewables in the power generation mix.  

The intermittency of renewables increases the sensitivity of power markets to unusually hot or cold days, since renewables are often not available when these events occur (aside from the obvious fact that solar energy is less abundant in cold weather, less wind tends to be available in hot weather). 

 3. Limited storage capacity could cause issues 

Storage capacity should act as a shock absorber at times of heightened demand or reduced supply. In recent years, however, little or no new storage has been commissioned. This is because with significant production growth meeting higher demand, summer-winter price spreads provided little financial incentive to build storage. With spreads returning, developers are becoming more interested in storage projects, but the 50 billion cubic feet or so of new capacity planned pales in comparison with market expansion.  

With production decisions and renewable intermittency already causing tightness in gas markets, the need to access stored gas at times of higher demand is more acute; during the short-lived cold snap in mid-January 2024, the maximum 64 bcfd of gas was pulled from storage. The key metric for storage is days of cover, since this assesses the availability of storage relative to market size; going into this winter, days of cover remain relatively low. 

4. LNG exports could impact domestic gas prices 

A major driver of growth in the US gas market is the export of liquefied natural gas (LNG). Exports are set to grow further this winter as two new projects, Venture Global’s Plaquemines in Louisiana and Stage Three of Cheniere Energy’s Corpus Christi in Texas come online. This could put further stress on domestic natural gas supply. 

Ironically, with overall US gas market expansion putting a strain on stored volumes of natural gas, LNG exports are increasingly being used as ‘synthetic storage’ to plug the gap. What that means in practice was seen during the severe cold weather in mid-January 2024. As demand exceeded the deliverability of stored gas, inflows of natural gas as feedstock for LNG exports halved – from nearly 15 bcfd to around 7 bcfd. Partly as a result, Henry Hub gas prices spiked northward toward thirteen dollars, while local prices in some areas went much higher than that.  

5. Weather risk will again impact both demand and supply 

While extreme weather is nothing new in the US, climate change is seeing an increase in the frequency and average severity of events This has obvious implications for gas demand; for example, although January 2024 as a whole was warmer than usual, the ‘arctic blast’ that hit most of the Lower 48 over the Martin Luther King holiday weekend saw demand hit 163 bcfd. 

Cold weather can also affect supply due to the possibility of freeze-offs, whereby water and other liquids in the gas can solidify and block the wellhead.  Historically, freeze-offs have averaged about 0.7% of Lower 48 production over an average winter. This can vary greatly depending on the location and severity of the cold event. What makes these supply losses so impactful is that they occur when the market needs supply the most. 

Remember to fill in the form at the top of the page to download the slides from the webinar. These include a wide range of charts analysing past and expected future market dynamics for the North American natural gas market.