The Curious Case of Natural Gas Markets

Some wise guy that goes by the name of Redpill Drifter on Twitter/X stood on a street in Encinitas, California, and asked people at random whether they

People are generally unaware of the value of natural gas and how it affects their daily lives. This was highlighted in a recent experiment where people were offered a choice between $20 cash or a 1-ounce gold coin. Despite gold being objectively more valuable, a surprising number of people opted for the cash.

To further illustrate this point, let's delve into the unique characteristics of natural gas markets and the challenges they present.

Natural gas is distinct from many other commodities due to its limited storage capacity. The ratio of storage to consumption is notably small, which creates a delicate balance. Production must closely align with consumption to avoid disruptions.

However, natural gas demand can fluctuate drastically, as evidenced by a recent chart from Criterion Research. It shows natural gas-fired power generation in Texas soaring from under 15,000 MW to 44,000 MW over two days in response to a cold snap. Had this weather event not occurred, demand would have remained lower, leaving a significant portion of natural gas unconsumed.

Moreover, natural gas is the primary fuel for electricity generation in Texas, heightening the impact of weather on prices. In colder regions, such as Chicago, these effects are amplified.

Any significant weather system, whether extreme heat or cold, can disrupt this balance, causing gas prices to spike or plummet. A cold winter followed by a hot summer can lead to pandemonium and high prices, which ultimately affect almost everyone. Conversely, a mild winter can result in a glut and a collapse in prices.

These dramatic shifts occur while most people are unaware. Market observers typically wake up to either a large red or green number, indicating the overnight change in the natural gas price based on the latest weather forecast.

As a consequence, natural gas traders can generate substantial profits, while producers often experience varying degrees of stress.

To further complicate matters, let's consider the broader macro forces at play in North America and the world.

Global demand for LNG is surging, and North America is a major hub for this booming industry. Even Canada is joining the ranks of LNG exporters.

But the most significant action is unfolding in the US, where LNG export terminals are being rapidly constructed. This will add several BCF per day of new demand that North American producers must fulfill.

To cap it off, consider that natural gas infrastructure additions typically span multiple decades due to the challenges involved in constructing them.

Now, let's recall that the US was actually an LNG importer in the 1970s, leading to the construction of four LNG import terminals between 1971 and 1980.

By the 1990s, the US was anticipating a shortage of natural gas. Twenty short years later, it had transitioned into a natural gas glut, prompting the first exports in 2016.

And just nine years after this pivotal event, the US has become the world's largest LNG exporter.

But the party is far from over. The US, particularly under the new administration, is expected to ramp up LNG exports further, with the potential for 10-15 BCF/d of new export capacity coming on stream within the next five years (including Canada, which is part of the North American natural gas system regardless of tariffs).

Finally, let's not forget the AI/data center boom that's taking off in parallel.

Tech companies are accustomed to getting what they want immediately because they have vast financial resources and operate in a fast-paced environment where they can fall behind in a matter of days or weeks.

Here's how tech companies typically function and expect everyone else to keep pace: Elon Musk set up his xAI data center, with 100,000 Nvidia GPUs, in 19 days (according to the Nvidia CEO, this process usually takes 4 years).

Just this week, Apple announced a staggering $500 billion investment in US tech, including a 250,000 square foot server manufacturing facility that is slated to open in 2026 – next year.

In contrast, a new interstate gas pipeline (forget about interprovincial) would require a year to decipher the regulatory code and comply with a thousand regulations and lawsuits. Tech moves at warp speed and seems to expect energy to be right there beside it.

Big tech also prefers clean power and is even considering nuclear as the ultimate option, especially SMRs – small modular reactors – but those won't be here for a decade.

So, natural gas will bear the brunt of the AI demand load for the next while, with forecasts ranging from 3-10 BCF/d of new demand being added by 2030.

Glory days for natural gas producers, right? Well, you’d think so. And maybe it will be thus, prices have risen substantially in the past twelve months (a real winter is the cause of that, but still