US natural gas market increasingly volatile amid falling coal, producer discipline

S&P Global Commodity Insights natural gas analysts expect price volatility to increase in the coming years due to a combination of retiring coal capacity, producer discipline, and a change in how storage is being utilized.

"The shale revolution lowered gas prices and reduced their volatility," the analysts wrote May 23 in their latest short-term outlook. "However, the supply and demand dynamics have shifted as the retirement of coal-fired power plants erodes demand elasticity, and consolidation among upstream players and their approach to capital investment has diminished supply elasticity."

While coal retirements are expected to slow in the coming years because of rising power demand, already around 45% of the fleet has been retired since 2011, the analysts said. This weakens "a crucial demand-balancing mechanism during market tightness."

This heightened susceptibility to price swings is expected to cause a run-up in prices this winter as LNG feedgas demand continues to rise. The analysts expect the gas market to tighten "in the second half of 2025 and remain in a prolonged deficit through mid-2026." The outlook calls for average Henry Hub cash prices of around $5/MMBtu in 2026.

Increases in gas supply from the Haynesville Shale, the main price-responsive gas play, are expected to trail rising LNG feedgas demand. "In the Haynesville, prices continue to lag from what producers require for a ramp-up in activity, which delays the increase in drilling activity until late 2025 when gas prices are expected to be higher," the outlook said. "Combined with six-month cycle times between drilling and production, this will push stronger supply growth to the second half of 2026."

Haynesville production has picked up slightly this summer, but remains well below its 2023 peak, Commodity Insights data showed. It averaged 13.8 Bcf/d during May 1-23, compared with 16.7 Bcf/d in May 2023, the data showed.

The rig count in the Haynesville was 36 for the week ended May 14, down by four year over year, Commodity Insights data showed.

Changing use cases for storage

The changing nature of gas storage is also contributing to gas market volatility.

"What everyone in the natural gas space, including myself, needs to understand or take renewed appreciation of is that the evolution of storage capacity contracting over time has diluted the market-correcting efficiency of the current US natural gas infrastructure," Commodity Insights analyst Luke Larsen wrote in a May 23 briefing. "More and more storage capacity is being held by non-traditional market participants who likely focus much less on shorter-term arbitrage opportunities, if at all, especially if it might compromise or jeopardize the corresponding business operations they were contracted for to begin with."

In recent years, demand for storage has picked up from LNG terminals and power companies, leading to higher prices and longer contract terms. Storage operators like Kinder Morgan say this is squeezing out some gas marketers, who prefer to hold capacity on a short-term basis.

Storage developers like NeuVentus say storage works as a kind of insurance policy for LNG exporters, as it enables them to avoid dumping a huge amount of gas on the spot market in the event of an unplanned outage.

Gas storage is also becoming increasingly important for the power market as gas plants balance out variable renewable generation. Power companies are the biggest market for Trinity Gas Storage, its CEO Jim Goetz said earlier this year.