Andrés Bayona
Natural Vehicular Gas Association of Mexico (AMGNV)
Expert Contributor

What to Expect From the Price of Natural Gas?

By Andrés Bayona | Thu, 10/21/2021 - 09:19

So far this year, the trend in the price of natural gas has been on an upward trajectory, independent of the atypical snowfall Texas experienced in February.

The recurring question is how will these prices perform going forward and the almost immediate answer is that the bullish streak will continue. However, the reasons are more complex than the answer. Here are five views postulated by AMGNV that we believe will prove relevant.

  1. Storm events in the Gulf: A slow recovery in production has been observed in the Gulf of Mexico region, which is causing a decrease in the supply of associated and dry natural gas.

Impact on the price:Seasonal

  1. Worldwide demand for LNG: To date, there are six baseload operating facilities in the US exporting +9 BCF / day, plus several additional facilities with an affirmative final investment decision, including at least two projects in Mexico. 

LNG exports go to 40 destinations as of 2021, including Mexico.

Impact on the price: Permanent

  1. Imports from Mexico by pipeline: From January to June 2021, imports have grown consistently from 5.8 to 6.5 BCF a day and is expected to grow as a result of a steady decline in local production from a peak of 7.03 BCF / day in 2007 to 4.77 BCF / day in June 2021. There are no investments in Mexico that could reverse this trend in the next five years, while the burning of natural gas is higher than 0.5 BCF / day. (> 11 percent production).

Impact on the price: Permanent.

  1. Shale gas maturity: Over time, Shale plays decrease the availability of shale oil in the central strata of the same and reduce the concentration until it is mostly natural gas. This reduces the profitability of the play and forces have to recognize higher costs to gas extraction, which until last year was to a large extent a product of shale oil.

Impact on the price:Incremental at the time.

  1. Changes in the global energy matrix: This has led to a higher demand for natural gas as a transition from coal or nuclear energy. This demand is expected to continue growing as the world moves toward greater electric mobility until at least 2050, when other technologies are expected to displace natural gas as the first energy commodity.

Impact on the price: Incremental at the time.

  1. Decline in oil production: Since 2019, several companies in the sector, such as Shell, have declared that they reached their peak of oil production and expect annual falls of between 1 and 2 percent due to lower expected demand. To date, this has resulted in a higher price of oil, marginally dragging on the price of natural gas.

Impact on the price:Incremental at the time.

  1. Changes in the uses of LPG (propane): Propane (polypropylene) is increasingly used by productive chains, changing its value of use to simply being a component of a value-added product affecting the price reference. The annual variation has led the Mont Belvieu index to grow + 174 percent, which is higher than the variation of the WTI (91 percent), marginally dragging the price of natural gas.

Impact on the price:Incremental at the time

  1. Winters that are colder than normal, reduced production, storage below the average of five years and prices that are higher earlier in the season of extraction suggest there will be one season of high volatility with a probability of peaking at more than US$10 / MMBtu at Henry Hub.

Impact on the price:Seasonal

In short, we are coming to the end of a very long period of stability in the price of gas, which will force us to adopt reasonably safe purchasing practices through hedging mechanisms. It is our review recommendation that mechanisms of this type, both forwards and call options have a reasonable level of price hedging to mitigate or eliminate the impacts that this scenario can cause especially in the coming winter season between November 2021 and March 2022. 

This strategy, for which we recommend expert advice from StoneX Financial to navigate this new world, is recommended as an integral part of price policy and permanent practice that could lead to the price of gas retaining a certain stability in the years to come.

Photo by:   Andrés Bayona