When nearby NYMEX natural gas futures reached the lowest price since 1995 in mid-2020, the first clue that the price was heading much higher came just days after the price fell to the low. In early July 2020, value investor Warren Buffett announced Berkshire Hathaway (BRK.A) bought Dominion Resources’ (D) natural gas pipeline and transmission assets for $10 billion. The deal called for $4 billion in cash and $6 billion in assumed debt. The transaction increased Berkshire Hathaway Energy’s exposure to all interstate US natural gas transmission from 8% to 18%.
Like an obedient puppy, the natural gas price followed Mr. Buffett and was trading above the $4 per MMBtu level on February 14, nearly three times the price when the Oracle of Omaha struck the Dominion deal.
While natural gas prices have appreciated dramatically over the past twenty months, the price action has been highly volatile. We are likely to see a continuation of wild price swings but will not see a return to the lows that made the pipeline and transmission assets so attractive for one of the world’s most successful value investors.
Higher lows and higher highs in natural gas
After falling to the June 2020 low, natural gas futures recovered, moving steadily higher through the second half of 2020 and the first half of 2021.
Since the 2020 twenty-five-year low, natural gas has made higher lows and higher highs, with the price experiencing wide price swings.
A dramatic price spike in late January as February futures expired
In late January 2022, as the February contract was expiring, the price experienced the most significant spike higher since 2005 and 2008 when Hurricanes Katrina and Rita wreaked havoc along the Louisiana Coast.
The price of the expiring futures contract rose to $7.346 per MMBtu, a level not seen since 2008 when the price was last above the $10 per MMBtu level. The active month March contract rose to $5.572 per MMBtu, a $1.774 per MMBtu discount to the February high.
Cold weather across the US and concerns over Russian natural gas exports to Europe combined to cause the price spike. Ukraine’s situation likely helped push natural gas higher, the weather and snowstorm were the leading factors as US heating demand rose.
US energy policy supports natural gas
The Biden administration shifted US energy policy from drill-baby-drill and frack-baby-frack to address climate change. Support for alternative and renewable energy sources comes at the expense of traditional fossil fuels. Increased regulations on hydrocarbon production and consumption have weighed on US supplies. The administration canceled the Keystone XL pipeline project on its first day in office. In May 2021, it banned drilling and fracking for gas and oil on federal lands in Alaska. The increased regulations weigh on US oil and gas production and the supply side of the fundamental equations.
Liquefied natural gas for export beyond the US pipeline network is a new demand vertical for the energy commodity. While the US has quadrillions of natural gas reserves in the Marcellus and Utica shale regions, extracting the supplies is slowing under the Biden administration. The energy policy supports higher prices as demand grows and resources are untapped.
European and Asian demand continues to rise
LNG suppliers have reported that they are sold out of the energy commodity for the coming years because of long-term supply contracts. They ship liquid gas to Asia, where the price is substantially higher. In Europe, prices have soared as Russia is the leading supplier, and the situation with Ukraine threatens supplies.
Rising European and Asian demand and much higher prices in those regions have put upward pressure on US prices as natural gas has become a more international commodity that now travels the world by ocean vessel.
Expect higher lows as we move into the 2022 US injection season
Natural gas declined after reaching a high of over $7.30 in late January on the expired February contract and $5.572 per MMBtu on February 2 on the March futures.
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