Bad News For U.S. Producers As Natural Gas Prices Plunge

1. US Gas Producers Face Difficult Decisions as Prices Drop

- For the first time since September 2020, Henry Hub natural gas futures plunged below $2 per mmBtu this week before bouncing back to a more palatable level of $2.4/mmBtu.

- The combination of a relatively mild winter in key US consumption hubs and excess domestic volumes on the back of the Freeport LNG outage depressed gas futures that only six months ago were trading above $10/mmBtu.

- US shale gas producer Chesapeake Energy was one of the first to claim they would be reducing their active rig fleet after the price plunge, with others expected to follow suit.

- Aggravating the pricing issue, many producers let their usual gas price hedges run out (EQT expects a $4.6 billion loss on derivatives for 2022) and thus are more exposed to current prices.

2. Attractive LNG Prices Set to Trigger Asian Demand

- Asian LNG buying activity is expected to increase over the upcoming months as the continent's benchmark JKM prices fell below $15 per mmBtu recently, the lower level in almost two years.

- The imminent restart of Freeport LNG might depress prices even further to $10-13/mmBtu, leading many Asian buyers that halted their purchases last year to start buying again.

- India is a case in point with state-owned GAIL and GSPC issuing separate buying tenders, whilst Thailand's PTT was rumored to have closed its tender for three cargoes between $14.5-15/mmBtu.

- In China, where LNG imports decreased by 20% year-on-year in 2022 to 63.4 million tons, buyers appear to be waiting for even lower prices.

3. Chinese Coal Catastrophe Happens at Worst Possible Time

- The collapse of an open pit mine in the faraway region of Inner Mongolia dents China's ability to maximize coal supply just as demand for the hydrocarbon is soaring.

- The last time when China suffered a string of coal mine collapses in 2021, Chinese authorities sealed off dozens of high-risk mines, meaning a repetition of those events could curb supply again.

- Meanwhile, coal burning at six major coastal power plants has risen 15% since the Lunar New Year as factories across the country are shifting into pre-pandemic levels of economic activity.

- The mine collapse triggered a rebound in domestic coal prices after they reached a one-year low earlier this month at $142 per metric tonne, with coal major Shenhua Energy even paying a premium to market prices to ensure it has enough supply.

4. European Carbon Prices Reach €100/Mt for The First Time Ever

- European carbon prices overtook the €100 per metric tonne (equivalent to $107/mt) for the first time in history this week, gaining more than 20% since the beginning of this year.

- The Russia-Ukraine war and subsequent sell-off of carbon contracts weighed heavily on carbon pricing last year, even though spiking natural gas prices made coal burning much more profitable than it should have been.

- Falling natural gas prices in Europe have improved the economic outlook of Europe, at the same time allowing energy-intensive industries such as metal smelting to restart operations, also compelling them to get into carbon trading again.

- As the carbon emission allowances are set to tighten in 2024-2027 by 4.3% each year, alongside the inclusion of new sectors such as shipping, there appears to be some long-term upside in the market.

5. China Ramps Up Buying of Russian Crude

- Russian exports of crude and fuel to China have soared to an all-time high this month as the Asian powerhouse is gradually ramping up its imports amidst improving domestic consumption.

- Since the Lunar New Year ended, key indicators all point to a huge uptick in domestic flights, government-funded construction activity as well as road freight, boosting refining runs.

- Russia's seaborne crude exports to China rose to 1.52 million b/d this month according to Kpler data, accounting for pipeline exports, too, this means that a quarter of Russian oil output ends up in China.

- With Russian barrels sold at -$10 to -$15 per barrel discounts to Brent, Chinese refiners are seeking to meet their increasing needs (demand might see 1 million b/d year-on-year growth in 2023) with discounted crudes.

6. Polysilicon Prices Soar Despite New Chinese Capacity

- The prices of polysilicon, a crucial material to produce solar cells, have been on an unprecedented rollercoaster lately, having fallen by more than 40% in December 2022, only to make an almost complete recovery in 2023 so far.

- The initial price decrease happened as many new Chinese polysilicon plants came online late last year, but instead of flooding the market producers have started to build up inventories.

- The reduced sales volumes and subsequent polysilicon price hike prompted key manufacturers of solar wafers such as Longi Green Energy or TCL Zhonghuan to increase their prices by some 20%.

- Whilst the price swings might adversely impact solar projects in the short term, market observers are nevertheless expecting polysilicon prices to shed their strength amidst a production glut.

7. Copper Soars as Other Commodities Stall

- Whilst the mining and refining of copper remains an extremely energy-intensive endeavor, copper prices have decoupled from oil and gas prices in the past months as extremely low inventories of the red metal act as a price floor.

- COMEX copper inventories are at their lowest level since early 2015, whilst production of the metal has been the slowest amongst other industrial metals such as iron ore or aluminum.

- Meanwhile, massive government stimulus into copper-heavy renewable energy, such as the $1.2 trillion Infrastructure Investment and Jobs Act approved by US Congress last November, underpin copper's outlook.

- China's reopening has been the most recent source of strength for copper prices, with consumption expected to increase this year by 3.5% compared to 2022 and domestic prices already up 10% since the reopening began in November.