C-MACC Sunday Thematic and Weekly Recap
Plunging US Natural Gas Prices – Export Incentives Ever Higher.
- Although the US built a major wave of new chemical capacity based on available cheap feedstock, plus added export capacity for almost everything in the chain, current natural gas prices suggest the US should build more.
- The step change in US oil production has driven more natural gas and NGL production than new LNG facilities, and its ethylene and propylene units can handle. Gas prices are low, historically so, compared to crude oil.
- We have more LNG under construction and one new ethylene unit, in addition to a few units that are not fully operational – current pricing and natural gas inventories suggest room for more North American additions.
- In the meantime, simple economics would suggest that every US hydrocarbon-producing and -consuming unit should run at capacity and push more into the export market – though this would slow natural gas focused E&P.
- We also look at the differences between Linde and Air Products, China deflation, the negative signals in the metals & mineral markets, who are at risk of slower hydrogen investment, and 2030 sustainability target risks.
- Companies Mentioned: Linde, Air Products, Air Liquide, DuPont, LyondellBasell, FMC, ExxonMobil, LifeZone Metals, Plug Power, Ørsted, BP, Shell, Petrobras, Equinor, ENI
- Products Mentioned: Ethylene, Propylene, NGLs, LNG, Hydrogen, Lithium, Oil, Natural Gas, Polyethylene, Polypropylene, Benzene, Polystyrene, Zinc
Lots of gas but no clean power for industry – listen to our webcast this coming Wednesday (February 14th)
Exhibit 1: The oil-to-gas ratio in the 2014-2016 period was enough to encourage substantial US investment
Source: Bloomberg, Capital IQ C-MACC Analysis, February 2024
Whether the current surplus of natural gas is more a factor of milder weather or the surge in US crude oil production, or likely a combination of both, we have an almost unprecedented gap between local natural gas prices in the US and global crude oil prices. When oil prices spiked in 2012 before the US shale investment started in earnest, there were a couple of months when gas was low and oil was high, as shown in the chart above, but gas quickly moved higher. While the ratio is interesting, the absolute value difference is also interesting as for much of the time when US natural gas was cheap, especially during the 1990s, crude oil was cheap also – Exhibit 2. In a past life, we produced one of the first ethylene cost curves – this was in 1995, and not surprisingly, the curve was much flatter than it is today – the cheap gas in the US was not much of an advantage. Today, the US can turn natural gas and NGLs into almost any derivative and sell them anywhere outside the Middle East at prices below local production costs. Should the US choose to push this opportunity to its limits of capacity in 2024, industry in much of the rest of the world is in a lot more trouble than it looks to be today. The LNG market globally has some elasticity, and so as global prices ease, we may see demand rise with customers in Asia and Europe who have the flexibility to take more gas at the expense of using more coal locally. However, there is no real elasticity to the chemical and polymer markets, and a push from the US will directly impact operating rates elsewhere.
See PDF below for all charts, tables and diagrams