The US energy market has witnessed dramatic shifts in recent hours, with natural gas prices surging past $6 per million British thermal units (MMBtu). This is the highest price increase since 2022, driven by a severe polar vortex that has gripped large swaths of the country, creating a double whammy of soaring heating demand coupled with widespread disruptions to supply chains and production.
Biggest weekly gains in decades
In what were described as historic early trading sessions, February futures contracts surged by as much as 20% to reach $6.28. This wasn't just a daily increase; prices also posted weekly gains of nearly 70%, marking the largest weekly price rise since records began in 1990. This figure reflects the panic gripping markets due to fears of fuel shortages for heating and electricity generation amid record-breaking low temperatures.
Paralysis in production and decline in exports
The energy sector's infrastructure was not spared the effects of the winter storm. Initial estimates indicate that the severe weather conditions disrupted approximately 10% of total US natural gas production due to well and pipeline freeze-offs. The impact extended beyond domestic consumption to global markets, with gas flows to US liquefied natural gas (LNG) export terminals falling to their lowest levels in a year. This could cast a shadow over global energy supplies, which are increasingly reliant on US gas.
The electricity crisis and the PJM network
In terms of electricity generation, the US East Coast has faced significant challenges. Power plant outages have recently increased due to limited natural gas supplies needed to operate turbines, coinciding with a severe cold wave that has increased electrical demand.
PJM Interconnection, which operates the largest regional power grid in the United States, serving approximately 67 million people in the East and Mid-Atlantic regions, announced outages of about 21 gigawatts of generating capacity. Data indicates that these outages represent roughly 16% of the grid's total electricity demand of 127.4 gigawatts yesterday afternoon, putting the grid to a real test of its resilience and ability to withstand extreme weather events.
Potential economic repercussions
This sudden rise in energy prices is seen as an indication of the fragility of supply chains in the face of natural disasters, which could lead to higher energy bills for American consumers and increased operating costs for factories, potentially impacting inflation rates in the short term if the cold snap lasts longer than expected.
