Market update: natural gas outlook winter 2024

As we continue into the winter season, Vicinity’s team has been evaluating weather patterns and predictions for the natural gas market to prepare our customers for potential price fluctuations.

After peaking in December 2023, the El Niño pattern continues, and February 2024 weather forecasts indicate above-average temperatures in the Northeast and Midwest, induced cooling in the South, and higher precipitation in the Pacific, which experts predict may continue into the remainder of the winter season.

The natural gas markets have reset to similar levels as 2021, before the geopolitical events in 2022 drove prices above average.

By the numbers: what we know and what we can expect

Prior to January 2024’s well freeze-offs, the U.S. lower 48 saw strong natural gas production, primarily due to efficiencies in the Permian Basin of the U.S. that have provided ample supply to the market, mitigating demand risk. However, due to colder weather in the Permian basin in recent weeks, natural gas production has fallen.

Currently, natural gas storage levels are 4% above 2023 levels and 5% above the 5-year average. Europe’s storage facilities were 80% full through the first half of January 2024, slowing European demand for LNG and suppressing pricing.

Colder weather conditions in January 2024 have contributed to well freeze-offs in the Permian natural gas basin, impacting output and potentially providing more upside risk to pricing. However, the January 2024 futures contract settlement was less than levels at this time last year.

Key electrification progress

The adverse effects of natural gas far outweigh the benefits of continuing to invest in this unsustainable fuel source.

In 2023, the U.S. saw an estimated 1.9% decrease in carbon emissions, as measured in research done by the Rhodium Group. Throughout the year, emissions remained below pre-pandemic levels and dropped to 17.2% below 2005 levels.

While this decrease is substantial, an even greater emissions reduction is necessary to limit climate change. In 2023, Earth’s average land and ocean surface temperature was 2.12 degrees F above the 20th century, making it the highest global temperature among all years recorded since 1850, according to the U.S. National Oceanic and Atmospheric Administration.

The undeniable climate crisis drives Vicinity’s progress towards transitioning away from fossil fuels and eliminating carbon emissions from our operations. By electrifying our operations nationwide, we will be able to offer an affordable, carbon-free path for building owners to meet sustainability goals and join us in limiting climate change.

Our first electric boiler has been delivered to our Kendall facility in Cambridge, Massachusetts, and it will enter service in 2024, immediately allowing our customers to harness carbon-free energy and decarbonize their buildings.

The industrial-scale heat pump complex we are developing in partnership with MAN Energy Solutions is undergoing engineering and will enter service in 2026. These milestones demonstrate our commitment and progress towards a net zero carbon future.

Market update: natural gas outlook 2023

Last year saw drastic changes in the natural gas market, from the ongoing war in Ukraine to record high energy prices to fluctuating natural gas inventories.

As we reported in our last natural gas outlook, the team at Vicinity is constantly monitoring the state of the fuel markets. United States natural gas spot prices saw lower prices throughout the country during the first two months of 2023, as mild weather patterns brought overall gas use to a five-year low of 110.65 Bcf/d for the two-month period.

U.S. temperatures averaged 42.8°F between January and February this winter, the third-highest average in the last 17 years. At the start of the winter season, the mild weather caused gas prices to reduce significantly, reaching pre-COVID-19 levels with the winter November 2023 through March 2024 time period now trading at an almost 38% decrease compared to highs seen for the corresponding months in 2022.

In this market update, we want to update you on what drove this price reduction, the state of global and domestic gas storage today, and predictions for the rest of the year. 

By the numbers: what we know and what we can expect

The start of this winter was very mild: this year saw the seventh warmest January on record in North America, leading to lower-than-expected natural gas consumption. In January 2023, the Henry Hub spot price of natural gas averaged $3.27 per MMBtu, down $2/MMBtu from December 2022.  

This shift led the U.S. Energy Information Administration (EIA) to forecast a Henry Hub spot price of $3.00/MMBtu for 2023. As the EIA noted, the largest decline in consumption was related to residential and commercial demand. Natural gas prices remain volatile; extreme weather events and cold temperatures could still pressure prices through March 2023.

An additional factor that could influence natural gas demand in the U.S. is the Freeport LNG export facility coming back online. The 3-train LNG export plant resumed partial operations in February 2023 and received confirmation from regulators on March 8, 2023 that the site has been cleared to resume its full capacity of 2.2 billion cubic feet per day. This incremental LNG Export capacity will create additional demand for natural gas. 

In June 2022, a fire at Freeport LNG’s natural gas plant in South Texas caused a full 8-month shutdown of the facility, leading to a decrease in U.S. liquefied natural gas (LNG) export capacity. During the shutdown, the U.S. reduced its LNG exports by 2.2 BCF/day.

After the partial restart of the plant, LNG demand grew as gas flows to all seven of the big U.S. LNG export plants rose to 13.5 bcf/d in March, up 5.5% from 12.8 bcf/d in February. The top destination for U.S. LNG cargoes are countries in Europe who have decreased delivered pipeline gas supply from Russia.

As a result of the milder weather patterns, steady production (97.5 BCF/d for the two-month period), and the Freeport LNG outage, gas storage inventories now stand at 2.1 TCF, which is a 22% surplus to the 5-year average for the same period. Even more notable is the surplus to year-ago storage levels which is now 32%.

Chart showing 5 year maximum and minimum underground gas storage

Natural gas and climate change

This winter’s record-low and high temperatures and subsequent natural gas demand fluctuations have sparked conversations on the many impacts of climate change.  

As the Natural Resources Defense Council (NRDC) explains, global warming occurs when greenhouse gases like CO2 collect in the atmosphere and absorb sunlight and solar radiation that have bounced off the earth’s surface. These pollutants, which remain in the atmosphere for many years, trap the heat and cause the planet to get hotter in the long term. 

In this way, global warming may contribute to more extreme winter weather. As water vapor is trapped in our atmosphere later and later in the year, the resulting precipitation leads to heavier snowfall when temperatures eventually drop.

We are already seeing the impact of global warming with warmer-than-normal winters and extreme heat in the summer months. In fact, since 1896, average winter temperatures across the continental U.S. have increased by nearly 3°F. Spring temperatures have increased by about 2°F, while summer and fall temperatures have increased by about 1.5°F.

How can Vicinity help?

The transition away from fossil fuels to renewable energy sources is leading the charge for the most energy-intensive industries around the world.

Heating, electricity, and energy transportation are consistently the single highest contributor to global carbon emissions. In 2020, it was reported that 76% of global carbon emissions came from the energy sector.

To reduce this staggering amount of carbon emissions, it is essential to transition to renewable energy sources and move away from fossil fuel use.

Here at Vicinity Energy, we are working with our customers, communities, and local government to decarbonize our operations across the country and do our part to reduce the impact of the energy sector on the earth’s warming atmosphere. 

Vicinity is currently in the process of electrifying its operations to offer an affordable, carbon-free path for the commercial buildings we serve. Our first electric boiler will enter service in 2024, immediately allowing our customers to harness carbon-free energy and decarbonize their buildings.

Looking ahead

With the many fluctuations in the natural gas market that we’ve seen this year, it’s clear that the benefits of investing in renewables far outweigh those of continuing to utilize natural gas to power our communities.  

Now is the time to fuel the transition to an entirely clean energy future and seize every opportunity to encourage the building of green infrastructure and invest in carbon-free energy sources.

What’s in store for the price of natural gas? Market update: winter 2022-2023

Since June 2020, when COVID-19 shut down much of the U.S. economy, natural gas prices have been up a staggering 525%. Put differently, today’s gas prices have skyrocketed to levels unseen since 2008—and several factors could continue to drive prices even higher.

With the ongoing war in the Ukraine and uncertainty in Europe, an increase in liquefied natural gas (LNG) exports, and warmer-than-average summer temperatures in much of the U.S., natural gas inventories are below historical averages. This leaves the market with less of a buffer going into peak winter heating season demand, providing potential upside price risk. While we have recently seen some modest dips in gas prices, Vicinity is still seeing record highs in many of the cities we serve.

By the numbers: what we know and what we could expect

According to the U.S. Energy Information Administration, the Henry Hub natural gas spot price averaged $8.80 per million British thermal units (MMBtu) in August, up from $7.28/MMBtu in July. September’s Henry Hub spot price settlement was $7.99/MMBtu versus $5.024/MMBtu seen during the same period last year.

The October NYMEX Henry Hub contract settled at $6.868/MMBtu, and the expectation is that the Henry Hub price will average about $5.76/MMBtu in November through December of 2022 and then fall to an average of about $5.18/MMBtu in 2023 as U.S. natural gas production rises. So even though there seem to be some price increases in our future, the hope is that the new year could start to bring some stabilization. After record-setting demand for power generation this past summer, seasonal demand is set to reduce in the next few months.

How is Vicinity helping?

Because of the uncertain environment, Vicinity is taking action to cost-effectively procure fuel and reduce price volatility to limit our customers’ exposure to price spikes during the prime heating season this winter.

In addition to continuously monitoring the markets and leveraging our considerable backup distillate fuel supplies, we’ll be pre-purchasing fuel to help ensure efficiency and reliability. Our market experts believe this approach will serve our customers’ best interests and achieve more bill stability and budget visibility.

The global movement away from fossil fuels

Without a doubt, there are challenges ahead for all building owners that rely on natural gas – and not just in terms of cost. As reliance on fossil fuels continues to exacerbate climate-related impacts and global leaders implement legislation to aggressively reduce carbon emissions, it’s clear that natural gas is not a progressive or healthy solution for our collective future.

Of course, some critics raise concerns about renewable energy’s cost and affordability. Still, the fact remains that our current energy crisis has affected everyone financially and reinforces the obvious—that fossil fuels are the elephant in the room.

However, despite the global energy shortage, Vicinity is well equipped to navigate these challenging times—unlike buildings with boilers that rely solely on natural gas. With multiple power supplies, backup generation, and several water and fuel sources, district energy systems are reliable, robust, and sustainable and provide safeguards to ensure 24/7 energy delivery.

Like Vicinity, many leading district energy systems (including those in Vancouver and Copenhagen) are implementing innovative strategies, like renewable fuels, heat pumps, and electric boilers, to further reduce their use and reliance on fossil fuels.

Vicinity’s Chief Customer Officer Jackie Bliss said it best in her recent article with Commonwealth Magazine:

“There will always be reasons not to act swiftly in our transition to a greener, cleaner economy, but now is not the time to lose resolve. Rather, the recent fears about energy security mean we should immediately triple down on our investment in renewables. That means more offshore wind and solar if it accomplishes our shared goals of improved energy security while also combatting climate change, an existential threat to our planet and future generations.”

A closer look: the advantages of district energy

While the global energy shortage will impact everyone, there are substantial benefits to being part of a district energy system. Here are a few ways Vicinity’s status as a district energy provider will help serve our customers through this global challenge:

  • We can negotiate fixed prices and better rates due to our superior bargaining power as a participant in energy markets, compared to a single building purchasing gas for its boilers.
  • Vicinity monitors customer usage carefully to ensure enough supply to keep all our customers functioning at their normal levels, even during an extreme weather event or a shortage. This is a huge advantage over individual boilers, where building owners must try to anticipate their load and make sure to order enough on an individual basis.
  • Most Vicinity district systems are fuel-agnostic, meaning our generators (chillers, boilers, etc.) can utilize various fuels, including renewable and alternative fuels, instead of being at the mercy of gas companies.
  • Vicinity uses a diverse fuel mix, including renewable biogenic fuel, so we’re not reliant on natural gas.
  • Furthermore, with the electric grid’s growing adoption of more renewable sources, we’re working on electrifying our district systems – a move that will drastically reduce our use of natural gas and conventional fossil fuel.

Looking ahead

There’s no question that we have a substantial problem on our hands. But the truth is, the solution isn’t only obvious—it’s already here. With so much uncertainty in tomorrow’s landscape, we need to recognize that what once seemed to be the answer is simply failing to keep up with today’s realities.

Isn’t it time we pivot away from fossil fuels and create a greener, more sustainable future?

The benefits of renewable energy will far outweigh the consequences of fueling the current solution. And district energy is just one example of how we can benefit from existing infrastructure (which reduces cost and saves space) to create a lower carbon footprint and a more reliable and affordable way to power us into the future.

The responsibility is now on us, and we have the forward-thinking means to start achieving energy security and a cleaner tomorrow right now—before we pay the price.