As originally published in SupplyChainBrain
Because of the increasing emphasis on cheaper and cleaner energy sources, natural gas has become one of the most important commodities for the U.S. economy. The incredible boom in production has led natural gas prices to decline dramatically during the past three years. However, 2017 was a pivotal year, as prices finally recovered in response to strengthening global demand.
Since 2014, the price of natural gas has fallen 11.7 percent on average each year, according to ProcurementIQ. Production has skyrocketed, particularly in Pennsylvania, Ohio and West Virginia, which sit atop the Marcellus Shale formation. This boom is due in large part to new fracking technology that has allowed natural gas to be extracted cheaply and efficiently. In turn, these new technologies have led to an oversupply of natural gas in the market, which has pushed prices way down. Furthermore, it is an intensely competitive market, which has encouraged suppliers to offer favorable prices to attract business. No company holds greater than a 5.0 percent market share, and competition from international companies is high and increasing. In fact, the market is highly globalized, with Qatar and Australia being the largest exporters of liquefied natural gas (LNG) worldwide. Though the U.S. still remains a net importer of natural gas, as domestic production has ramped up, imports fell at an average annual rate of 9.4 percent during the past three years.
Additionally, from 2014 to 2017, while supply was swelling, demand for natural gas was lagging, remaining flat and even contracting in some areas. This sluggish demand growth further pressured prices downward. For instance, one of the largest consumption markets for natural gas is the electric power grid. During the past three years, electric power consumption has fallen overall due to advances in energy efficiency, which have ultimately weakened demand for natural gas. Further, the industrial production index, which is a good measure of economic activity in the manufacturing, mining, and gas sectors, has been largely stagnant since 2014. The combination of weak demand and a huge boom in supply has caused natural gas prices to take a nosedive.
Last year, however, the natural gas market rebounded. Prices spiked dramatically in 2017, rising 30.7 percent. Seeking relief from this year’s heat waves, consumers powered up their air conditioning units, causing consumption levels to increase as more electricity flowed through households. Also, the recent string of hurricanes has disrupted supply chains, particularly hubs in Texas and Louisiana, leading to temporary shortages. Moreover, as developing countries, particularly in Asia, have invested more in infrastructure supporting natural gas, U.S. exports have seen an increase, which has effectively decreased supply levels available to domestic buyers.
Looking ahead, U.S. exports are expected to continue their rapid increase. According to the International Energy Agency (IEA), the U.S. is aiming to be a net exporter by the end of 2018. Additionally, the IEA has estimated that the U.S. will account for more than a fifth of the global gas output by 2022, and could be one of the top exporting countries in the world by then. Overall, ProcurementIQ forecasts continued price growth through 2020, anticipating that prices will rise an annualized 2.3 percent as global demand catches up to supply levels.