U.S. Henry Hub natural gas is up another 5%+ Wednesday, trading at $4.8 mBtu, up 87% year to date. It has certainly broken that boring $1.5-$2.5 mBtu range that we had gotten so used to. Gas is often seen as the cheapest commodity, mostly because of how abundant and how cheap it is to drill. But something changed this year. Across Europe, shortages and increased demand from Asia have seen the cost of gas increase to the highest level ever on record. To put it into context, Asian LNG prices are trading above $20 per mBtu barrier today (seasonal high). In Europe, we are seeing day to day new highs in UK NBP and Dutch TTF, trading above $19/mBtu. That is the equivalent of Asian/European gas trading closer to $110/bbl. of oil.
Given Hurricane Ida, Gulf of Mexico shut in is closer to 2bcf/d and judging by all the weekly injections, it is estimated that end of season storage in October will be closer to 3.465 tcf. This is before winter demand kicks in. Currently, LNG exports are extremely strong averaging about 11 bcf/d. This pull away to LNG markets mixed with strong demand at a time when there is outage and shortage in Europe is creating the perfect storm for natural gas.
All the years of decommissioning coal given the focus of clean emissions and using clean and sustainable energy, coal prices seem to have woken up from the dead as China has now allowed shuttered coal mines to restart production amid the surge in demand. Fifteen mines across China's northern regions have now restarted operations. So much for "bringing their emissions to a peak by 2030, and to make the country carbon neutral by 2060."
At the end of the day, countries and companies especially, will use whatever form of energy there is as long as it is cheap and makes economic sense. If we keep giving into using these dirty forms of energy, how will the world ever move towards cleaner energy? After all prices need to move to a level to incentivize more investment. If we keep falling short, when will the transition be complete? China is the world largest polluter and emits 30% of the worlds greenhouse gases. Despite its goals, it is planning to build 43 new coal fired plants and 18 new blast furnaces, equivalent to adding about 1.5% to its annual emissions.
Even the UK announced in Monday that it would be firing up an old coal plant to meet its electricity needs. Coal is only about 3% of national power, but gas prices are making it extremely hard to produce given the costs. If one looks at the spectrum of gas and coal, there is always this economic spectrum whereby using one is more economical than the other, but at a certain price level that desire changes very quickly. UK now faces higher gas bills starting in October that will add £139 to the price cap. This is going to hurt households and add to the inflation picture, which the Fed still thinks is transient across the board.
Wholesale EU gas prices have reached a high as Russia withholds supply given the NordStream 2 debate. All of this is compounding the problem and is showing up in aggressively higher LNG prices. Eventually higher gas prices mean higher coal prices and today China's coal prices are trading at $140/tonne. It is all connected but one thing is certain, right now China's focus is to help the domestic market and shield them from higher costs. Its crackdown on tech sector and various industries is all part of Xi Jinping's plan to normalize the top and the bottom. It is not about entrepreneurship or free market capitalism, it is about the people. When it comes to that, dirty or not, climate change goes out the door as now even U.S. companies will be looking to pump more gas given the extremely high prices.
Companies can preach capital discipline all they like. If prices are high enough, they salivate and start to drill to capitalize on the price surges. There is a lot of talk about U.S. domestic shale having its hands tied behind its back post the 2020 collapse, but it will be important to keep an eye on them to see how they react to these prices despite the promises they made to their shareholders to drill less and return cash back to them. Commodity exposed companies are all dictated by where the price of the commodity is. In a short window of time the tightness can cause huge price swings especially during winter periods if storage is already low. Economics 101, when demand takes the price higher, supply eventually catches up.
