North America is not running out of natural gas.
The United States and Canada possess enormous undeveloped supply potential across the Montney, Marcellus, Haynesville, Permian and other major producing regions. At a sufficiently attractive price, and given the time and capital, producers have proven capable of adding substantial new volumes.
That is the strongest argument against a sustained structural natural gas shortage.
But abundant gas in the ground does not guarantee stable prices at the market hub, power plant or city gate where it is needed.
North America’s natural gas market may increasingly be defined by a seemingly contradictory combination: plentiful long-term supply and more frequent short-term price volatility.
The reason is that production and demand have grown much faster than the system’s ability to store and transport gas.
Over the past two decades, U.S. natural gas production has roughly doubled, driven by the shale revolution. Demand has also expanded by a similar amount through gas-fired electricity generation, industrial consumption, pipeline exports to Mexico and, increasingly, liquefied natural gas exports. The story is similar in Canada with production increasing albeit at a slower pace, and driven by the Montney.
And yet, storage capacity by comparison has barely grown.
The result is a smaller storage cushion relative to the total size of the market. Each trillion cubic feet of gas in storage now represents fewer days of demand than it did when the North American gas system was considerably smaller.
That may not matter during mild weather and normal operating conditions. Production can generally respond to market signals, pipelines continue flowing and storage withdrawals remain manageable.
But natural gas demand is highly sensitive to temperature.
A major cold spell can add several billion cubic feet per day of heating demand almost immediately. Production cannot increase at the same speed. New wells take time to drill, complete and connect, while gathering systems, processing plants and pipelines all have physical limits.
During these periods, the market does not need to run out of gas for prices to rise sharply. It only needs to become concerned that inventories are being depleted too quickly or that deliverability will be insufficient at a particular location.
That distinction is important.
North America may have decades of natural gas resources, but only a limited volume can be withdrawn from storage and delivered through pipelines on a given winter day.
Pricing then becomes be less about whether sufficient gas exists and more about whether it can reach the right market at the right time. Too much gas trapped behind demand centers without the infrastructure to get there, and prices can sag. Not enough infrastructure to get gas to where it needs to go and prices can spike where it’s needed most.
Regional price behaviour already demonstrates this dynamic.
In the Permian Basin, enormous associated gas production has recently overwhelmed available pipeline capacity, often pushing prices at the Waha hub below zero. Producers may be willing to sell gas cheaply or even pay for it to be taken, because it is produced alongside more valuable crude oil. Recent pipeline constraints appear to be easing somewhat with Waha prices now trading back above zero as of late.
At the same time, constrained markets in the northeastern United States can experience extreme price spikes during cold winter months. The gas may exist in Appalachia only a relatively short distance away, but insufficient pipeline capacity can prevent enough of it from reaching New England and other high demand markets.
Western Canada faces its own version of the problem.
The Montney can produce enormous volumes, but maintenance, processing outages and pipeline restrictions has historically trapped gas in Alberta and British Columbia. That can cause AECO prices to collapse even while stronger prices are available elsewhere in North America.
These are examples of infrastructure issues.
The same continent can therefore experience negative gas prices in one region and stronger prices in another.
This points toward a market characterized by long periods of relatively subdued pricing followed by sudden and potentially severe upward moves.
When weather is mild and infrastructure is operating normally, North America’s large supply base will likely keep prices under pressure. Producers have repeatedly demonstrated that they can respond to stronger prices by adding rigs, completing drilled wells and increasing output.
That supply response should continue to limit how long high prices can persist.
But it may not prevent them from occurring.
A cold start to winter, a late-season freeze, a pipeline outage or a production disruption can rapidly alter the storage trajectory. With less storage capacity relative to demand, the margin for error becomes smaller.
A seemingly comfortable inventory position can deteriorate quickly when withdrawals begin running tens of billions of cubic feet above expectations each week.
The market then has to ration demand before new production can arrive.
That rationing mechanism is price.
During ordinary conditions, prices may remain too low to encourage aggressive supply growth. During a genuine weather shock, they may need to rise far enough—and fast enough—to discourage industrial use, reduce gas-fired power demand where alternatives exist and attract every available molecule toward the constrained market.
The result could be a natural gas market that spends much of its time appearing oversupplied, only to periodically behave as though gas is scarce. The last few years provide evidence of this. There have been several price spikes in the last few years alone, with prices always settling back in to the baseline after the demand spikes have passed.
Growing LNG exports reinforce this dynamic.
LNG terminals create a large, relatively steady source of demand that does not necessarily decline when North American weather turns colder. Although exports can be reduced by maintenance, economics or operational disruptions, contracted LNG facilities generally seek to operate at high utilization rates.
That means a larger portion of North American production is effectively committed before winter heating demand arrives.
U.S. LNG export capacity is continuing to expand, while LNG Canada has introduced a new source of demand in Western Canada. Additional export projects would further increase the amount of gas flowing toward coastal terminals.
This does not create a shortage. Higher and more reliable demand can and likely will support the development of additional supply.
But production investment typically responds over months or years. Weather-driven demand can change within days.
The faster demand grows relative to storage and pipeline capacity, the more sensitive the market may become to short-term disruptions.
The bearish case for North American natural gas remains credible.
The resource base is immense. Drilling productivity is strong. Associated gas production can continue even when gas prices themselves are unattractive. At sufficiently high prices, producers have a powerful incentive to increase output.
Those factors make it difficult to argue that North America will face a structural physical shortage of natural gas anytime soon.
But they do not eliminate the possibility of recurring temporary shortages.
The emerging issue is not the amount of gas underground. It is the limited inventory and infrastructure available to bridge the gap between normal conditions and peak demand.
That creates a market with two very different personalities.
For much of the year, abundant supply may weigh on prices and reinforce the view that natural gas is structurally oversupplied.
Then winter arrives.
If temperatures remain normal, the calm can continue. If severe cold coincides with low inventories, freeze-offs or pipeline constraints, the available cushion can disappear quickly and prices may move far higher than long-term supply fundamentals alone would suggest.
North America can have too much natural gas on an annual basis and not enough gas in the right place on the coldest days of the year.
That is the setup for a market offering prolonged periods of low prices, interrupted by increasingly sharp episodes of volatility.
If volatility becomes a defining characteristic of the market, not all natural gas producers will be created equal. Those with access to storage, multiple market hubs and flexible marketing arrangements may be able to capitalize on short-lived pricing spikes, improving average realized prices over time.