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Commodities Corner: How natural gas will play a ‘transition role’ in the move toward net-zero emissions

The natural gas market has seen some notably large day-to-day price moves since the start of the year—and that’s not just because of the weather.

The volatility has also been driven by demand swings resulting from the impact of the latest wave of the pandemic during the northern hemisphere winter and an increasingly “interdependent” world supply chain for pipelines and liquefied-natural-gas transport, as well as the push toward renewables, says Phil Kangas, advisory leader for natural resources and mining at Grant Thornton.

On Jan. 27, natural-gas futures
NG00,
-1.47%

NGH22,
-1.47%

marked their largest one-day percentage rise on record, with the February contract posting a 46.5% climb on its expiration day to settle at $6.265 per million British thermal units—the highest finish since October of last year.

That move was due to growing uncertainty about the political situation in Ukraine, colder-than-normal weather forecasted in China, and pandemic-related restrictions, which “kept investors off balance,” as well as low trading volume, says Kangas. Overall, however, wild swings for natural gas have become more common this year, with prices up almost 31% in January, but down about 18% this month as of Feb. 9.

“The new normal is born out of the past decade of very low returns from domestic shale producers,” coupled with the complete stoppage of well drilling and completions during the initial 2020 pandemic, says Campbell Faulkner, senior vice president at OTC Global Holdings.

Natural gas is an “extremely seasonal and weather-dependent commodity that is prone to natural corners and price volatility,” he says, explaining that natural corners occur when the prompt futures contracts trade at a higher premium to future delivery months. And natural gas is used for more than just cooking and space heating — it’s a “crucial part of the domestic energy supply,” he says.

A lot has changed since prices for the fuel settled at a record high above $15 in late 2005. The advent of enhanced extraction techniques such as multistage hydraulic fracturing, or fracking, and improved directional drilling capability in 2007 to 2008 “forever changed” the market for natural gas, says Kangas. A supply surge and the 2008-09 recession followed, driving prices down, he says, but natural-gas demand continued to grow, and in 2015, the commodity took over as the largest source of U.S. electricity generation.

Coal
MTFC00,
+1.05%

had been the dominant energy source for generating electricity for decades, but natural-gas-fired generation first surpassed coal generation on a monthly basis in April 2015, accord to the Energy Information Administration.

Natural gas emits substantially lower greenhouse gas emissions than coal, and it’s “well suited to complement renewable energy,” such as wind and solar, which are not yet able to deliver uninterrupted power generation, says Kangas. That puts natural gas into a “transition role” as nations plan for net-zero emissions by 2050.

Read: Don’t rule out natural gas in the clean-energy transition, trade group says

Also see: There’s a smart way to invest in the clean-energy transition right now

As alternative energy sources come on-line, gas-fired electricity will offer “gap coverage flexibility” for power generation, he says, adding that market share for natural gas will grow. But long-term pressure to move away from fossil fuels will remain, “weaning nations away from natural gas, coal, and oil,” says Kangas.

Traders will continue to watch developments tied to Ukraine, which is a key transit route for Russian gas to Europe. Faulkner says that U.S. natural-gas prices would see a temporary boost in the event of an escalation in tensions or full-blown conflict, with prices moving up to about $6.50 to $7 per million British thermal units. But U.S. liquefied-natural-gas exports are at the limit and wouldn’t be able to fill the supply gap.

For now, prices should remain “north of $4” for the rest of this year, with some dips into the mid- to high-$3.50 range, but are also likely to be volatile for months to come, he says.

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