Weak natural gas prices through most of 2024 challenged the industry’s profitability, but they helped to dramatically ease the pace of U.S. inflation and, by extension, nudged the Federal Reserve (Fed) to the doorstep of interest rate cuts.
Rate reductions would lower borrowing costs and could bolster the profitability of new LNG facilities now in the works along the Gulf Coast. Infrastructure expansions needed to move more oil and gas -- including the 2.5 Bcf/d Matterhorn Express Pipeline in the Permian Basin that is due online by October -- also are underway or in late-stage planning phases.
Financing expenses for such projects would decline alongside lower interest rates. Should costs fall, it could hasten completion of some projects, increasing the U.S. natural gas sector’s ability to meet mounting global demand. If more supply gets sent via pipeline to Mexico or in the form of liquefied natural gas overseas, it could ratchet up competition and support prices.
As such, energy firms are watching the central bank’s policymakers closely, according to analysts.
Mounting expectations for rate cuts already provided a boost for oil prices this month, said Rystad Energy analyst Svetlana Tretyakova, and could also bolster natural gas markets should the Fed take action in September as expected.
“Overall market sentiment has been buoyed by expectations of a more accommodative U.S. monetary policy," Tretyakova said this week.
Tudor, Pickering, Holt & Co. analyst Matt Portillo agreed and said lower rates could bolster the sector and the futures market.
At issue: The Consumer Price Index (CPI) climbed at a 2.9% annual pace in July, the Labor Department said. That was down from a peak above 9% in 2022. Inflation surged that year in part because of fallout from the pandemic and soaring energy costs in the wake of Russia’s invasion of Ukraine. Such spikes were most evident in natural gas markets. U.S. prompt month futures surged to nearly $10.00/MMBtu that year. Cash prices climbed even higher.
The war in Ukraine resulted in a global reordering of energy flows as Europe, to a large degree, parted company with Russia’s natural gas supplies and turned to the United States to fill the void. U.S. producers ramped up to meet the demand, but after two years, Europe successfully stocked up on American LNG – along with supplies from other countries -- and both global demand and prices have since settled down substantially following a mild 2023-2024 winter.
The September Nymex gas futures contract settled at $$1.904/MMBtu on Tuesday, down 5.2 cents day/day. NGI’s Spot Gas National Avg. shed 2.5 cents to $1.525. Both are down for the summer and the year to date.
Rate Rollercoaster
The U.S. central bank boosted its benchmark rate from near zero to above 5% between spring 2022 and July of last year. It has held steady since, keeping borrowing costs elevated to curb spending and tame inflation.
The aggressive action had its intended effect, Fed Chair Jerome Powell said at a symposium last week in Wyoming. The side effect, however, proved to be a slowing job market and overall economy. Powell said the Fed’s attention should soon shift from inflation back to the job market. By lowering rates, the goal is to stimulate hiring and support economic growth.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.”
He added: “We will do everything we can to support a strong labor market as we make further progress toward price stability.”
Powell stopped short of announcing a timeline or pace of cuts, but analysts and economists widely expect at least a 25 basis point reduction in September with more to follow later this year and next.
“Provided a 25 basis point cut plays out in September, we think the Fed would leave open the possibility of a 50 basis point move at a later meeting,” said Andrew Husby, senior U.S. economist at BNP Paribas.
Raymond James Chief Investment Officer Larry Adam agreed September was nearly a cinch.
“Policymakers have been grappling with the right time to start dialing back their restrictive policy stance for nearly a year now. But as growth moderates, the labor market cools, and inflation risks ease, the stars have aligned for a September rate cut of at least 25 basis points,” he said.
“This will be welcome news for the markets as the Fed proactively easing should support growth, extend the life of the economic expansion” – already four years – “and maximize employment,” Adam said. “And while the market has priced in an aggressive, front-loaded easing cycle -- nearly 200 basis points of rate cuts are expected over the next 12 months -- the pace and magnitude of the Fed’s rate path will be dictated by the incoming economic data.”
