Key Catalysts and Influences on the Pricing of US Natural Gas

Sept 2

6 minutes

Conrad Krol | Andrew Cun | Alexander Cao | Ryan Lung

Bellevue High School

Westbank Financials

Author’s Note

The information contained in this research paper is for educational and informational purposes only and should not be considered as financial advice. Analyses and opinions expressed in paper are based on data available at the time of writing and are subject to change without notice.

Introduction

A pivotal part of the US energy sector is natural gas, a component that influences economic, environmental, and geopolitical developments. This article serves as an in-depth analysis of the US natural gas market, and all the components which may affect its pricing and future. This article’s topics include interest rates, economic conditions, political influences, and LNG (Liquified Natural Gas) export terminals will all be taken into account to ensure an unbiased and balanced view is projected. Additionally, these insights may provide further information into potential price and market shifts in the near future.

Economic Factors

Interest Rates

A primary influence on not just natural gas but the USA as a whole is current and expected interest rates. This influence can be seen significantly in the natural gas industry through several means. First, if an incline in interest rates is expected, borrowing costs will typically increase which may lead to lessened investments in natural gas production and infrastructure. 

This overall decrease in investments may affect the leading reason for the price shift in a commodity; supply and demand. This slowdown in investment leads to a diminished supply, which will lead to higher natural gas prices supporting a bullish thesis. Inversely, lower interest rates correlate with an increase in investments which often leads to an increase in supply and a decrease in natural gas prices.

Economic State of World

Next, the overall economic growth and situation of the world must be taken into account. A relatively obvious indication of natural gas prices is the state of the economy. First, a relatively strong and growing economy is a direct link to increased consumption and industrial activity, further increasing the demand for natural gas within the USA, further supporting a bullish thesis. Contrarily, economic depressions or recessions tend to result in a decrease in spending, leading to lower demand and lower gas prices. It is important to understand that current economic indicators are pointing towards a recession, such as a decrease in consumer spending, a 0.5% increase in unemployment rates since the 3-month MA (Moving Average) low, and a consecutive quarter of negative GDP growth. 

Inflation

The final economic factor that must be analyzed is inflation, which additionally can be correlated to interest rates and potential downturns in the economy. Inflation has a direct relation to the COG and services, which includes natural gas and the energy industry as a whole. An increase in inflation results in increased production and transportation costs resulting in an inflated natural gas price as well, meanwhile in a low-inflation situation, the costs of natural gas may decrease or consolidate. It is important to understand that interest rates and inflation are inversely correlated externally and within the price of natural gasses. This means that a rising interest rate (bullish for natural gas) will result in lower inflation (bearish for natural gas) overall creating a contradictory scenario. This is why it’s imperative to analyze other driving factors such as LNG export terminals and political influences which will be further analyzed in this paper.

Infrastructure Developments

Moving away from the economy, the fundamental factors that may affect natural gas pricing are LNG export terminals and their effect on pricing and global demand. The first impact that LNG export terminals may have is infrastructural expansion. The United States has had a significant increase in LNG export terminals in the past several years. These export terminals have not only allowed for the United States to expand their ability to export natural gas globally but also may lead to higher domestic natural gas prices. 

Additionally, 5 new LNG export terminal projects have been established in 2024 alone with a combined 9.7 BCF/D (Billion Cubic Feet per Day) LNG export capacity overall connecting the USA with worldwide buyers. A correlating factor to the increase in LNG export terminals is the domestic prices of natural gas, which may very well increase to align with international market prices due to the connection these terminals provide to the rest of the globe. The international demand for LNG may also affect United States natural gas prices further supporting the bullish stance LNG terminals provide. European and Asian markets have shown interest in diversifying energy sources to lower risk and less volatile suppliers putting U.S. LNG terminals in the spotlight. This could potentially lead to LNG terminals increasing in value overall leading to higher global prices creating a divergence in global and domestic prices which is often an indication of higher domestic prices.

Political Effects

Another key factor that must be analyzed is electoral influences, especially with the incoming 2024 elections. The primary factor that must be analyzed is policy changes, specifically energy policies. For example, aggressive climate policies motivate further investment in renewable energy funneling money away from natural gas investments negatively impacting prices. An example of this would be the Green New Deal which works towards transitioning the USA to fully green and renewable energy. This deal would be favored assuming a democratic electorate is elected, potentially leading to raised natural gas prices due to a decrease in supply. On the contrary, a conservative elector, specifically Trump in this scenario, would promote natural gas drilling along the East Coast. This would result in an increased supply, matching current demand leading to overall lower natural gas prices.

Divergence in Pricing

The final indication of natural gas pricing that is important to understand is the clear divergence between international and U.S. natural gas prices. This divergence in price is a common phenomenon, often attributed to the fact that U.S. and international natural gas prices are influenced differently. First, international prices are often influenced by a broad range of factors such as geopolitical issues and global supply(as seen through the effects of LNG export terminals on international prices) while domestic natural gas prices are influenced by traditional supply and demand dynamics. This divergence can be used as an indication as to where U.S. natural gas prices are headed, as seen through the potential increase in domestic prices as U.S. LNG exports increase, reflecting the international market trends. On the contrary, it’s also important to understand that these price discrepancies are also attributed to the fact that demand patterns, transportation costs, and other variables vary between the two markets. 

Conclusion

Natural gas prices in the U.S. tend to be difficult to predict due to the complex relationships between the discussed topics in this article such as interest rates, political changes, current economic conditions, infrastructure development, and overall market dynamics. Often times these factors may contradict themselves as seen through the relationship between interest rates and inflation and their effects on natural gas prices. Regardless, these influences may very well lead to a clear convergence or divergence in U.S. and international gas prices, creating opportunities for investors and market participants.