It's hard to believe we're seeing $8 US natural gas.
Henry Hub pricing hit a new high today and you have to take a look at a long-term monthly chart to understand how long it's been since prices were this high.
The average for the past 12 years has been around $3 with many forays under $2. This is far removed from European prices, which are above $30 but that's due to a lack of supply.
The US and Canada have enormous reserves of natural gas. The step down in pricing after 2008 is a result of the shale revolution. People associate shale with gas but it was really natural gas drilling technology and it unlocked decades of easy supply.
In the longer-term, the trade is convergence in global prices as LNG facilities are brought online in the US and Canada but that's a 2030 trade, if not much later.
Given the profits from drilling for gas right now, this move is entirely unsustainable. That said, drillers don't be in any hurry to drill. The story here may be that supply chain issues are a bigger problem in oil & gas that assumed. Halliburton last week said it was sold out of drilling equipment for the remainder of the year.
Driller discipline is also here to stay. Diamondback Energy today said that it had heard US government calls for more production but that it didn't consider it appropriate to increase spending to add supply that would not be brought online for multiple quarters. That's been a common refrain with Exxon saying the same thing on Friday.
What's also misunderstood is how connected US natural gas prices are to US electricity rates. If this is the end of cheap natural gas, it's also the end of cheap US electricity. That has flow-through effects to the price of everything and will mean stubbornly high inflation, along with disruption in energy-intensive industries.
Here is what ERCOT electricity pricing looks like for Texas late this summer via @USAEnergyNatGas.
There's also a knock-on here for bitcoin. Mining in Texas has been rapidly growing due to the unregulated grid but this could create some blowback.
Overall, energy and the green transition continues to shape up as the trade of the decade. We need to solve for all aspects of energy -- availability, affordability, reliability, and security. Until that happens, prices will stay high.
