Wild Ride Seen for U.S. Gas as LNG Exports to Boost Volatility

The Chevron LNG carrier Asia Vision, which was used to ship the first export cargo of U.S. natural gas from Cheniere Energy Inc.’s Sabine Pass terminal in Louisiana in February. Photo: Chevron

By Ryan Collins

(Bloomberg) — U.S. natural gas traders may be in for a bumpy ride.

Price swings in the gas market have been fairly muted over the past two years as abundant output from shale basins kept futures trading within a narrow range. That’s about to change as the U.S. boosts exports of the fuel in the form of liquefied natural gas, leading to potential supply constraints in the colder months, according to EBW Analytics Group.

Booming shale production has put the U.S. on course to export more gas than it imports by mid-2017, the first time that’s happened in 50 years. That could limit supplies to domestic buyers in the winter, making the market vulnerable to price spikes when demand for the heating fuel is highest.

“We’re on the cusp of a paradigm shift,” Andrew Weissman, chief executive officer of EBW, a Washington-based energy analysis company, said by phone. In three to four years, “the swings in demand year over year, or month over month, or even week over week may be much greater than anything we’ve seen in the past.”

For a QuickTake explainer on the future of LNG, click here

Within five years, the International Energy Agency expects the U.S. to become the third-largest LNG supplier in the world. As of July 15, the U.S. Department of Energy had given 18 authorizations for projects to export as much as 13.22 billion cubic feet a day of gas to countries that don’t have free-trade agreements with the U.S.

Coal Retirements

This trend, along with the retirement of coal plants and increased exports via pipeline to Mexico, will make the gas market more volatile than ever before, especially during winters in the northern hemisphere, Weissman said.

Power generators’ ability to switch between coal and gas has kept volatility in check in the last five years, but that option may be limited in the future. Last year, coal accounted for more than 80 percent of retired electric generating capacity, according to the Energy Information Administration. So far this year, 43 coal units have been shut.

“As more and more coal plants retire, that safety valve to moderate and to modulate price swings is shrinking very dramatically,” Weissman said.

While technological advances have made it easier for gas drillers to increase production at a rapid pace, it may not be fast enough to keep a lid on volatility.

“The fact that producers at least in theory can ramp up production at a much faster pace than was possible in the past doesn’t mean that they can very rapidly achieve very huge increases in production overnight,” Weissman said.

© 2016 Bloomberg L.P