Federal Reserve (Fed) policymakers on Wednesday, citing the resilience of the U.S. job market and broader economy, left interest rates at elevated levels. This, in turn, could deter borrowing and new investment at a time when natural gas producers are bracing for long-term growth to meet a surge in global LNG demand.
At issue: The Fed pushed up its benchmark rate multiple times over the course of 2022 and last year – more than doubling borrowing costs. It did this as part of an effort to tame spending and curb inflation that reached a 40-year high of 9.1% in mid-2022. The interest increases made a big impact. The inflation rate stood at 6.5% at the end of 2022 and fell to 3.4% at the close of last year.
Still, inflation continues to hover well above the Fed’s preferred long-term level of 2% –a pace at which the economy can grow steadily without price shocks, officials say.
Heading into the Fed’s meeting Wednesday, few had expected a rate decline – or another hike – but market speculation had swelled that cuts were in the cards for 2024, potentially as soon as March. But, in keeping their target rates in a 5.25-5.50% range, policymakers said they are in no hurry to shift into cutting mode. They are worried about slashing rates only to see inflation surge anew. They did, however, leave the door open for rate cuts at some point this year.
In their updated policy statement, Fed officials said, “the committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Fed analysts said a slowing – but still solid – economy could once again overheat and send inflation higher.
Gross Domestic Product (GDP) rose 3.3% at an annual rate in the fourth quarter, following robust growth in the third quarter of 4.9%, according to the Commerce Department. The U.S. unemployment rate in December held even with the prior month at 3.7%, near six-decade lows, while the economy added 216,000 jobs in the final month of 2023, capping a strong year of growth, the Labor Department said.
The data show “an economy that continues to thrive. The consumer, boosted by a strong job market and wage growth, has trounced last year’s recession fears,” said Damian McIntyre, portfolio manager at Federated Hermes Inc. The GDP reading “likely reduces” the number of rate cuts in 2024, should the Fed take that route.
All of which means natural gas producers – and the infrastructure companies that move gas – may have to continue to weather heavy debt costs, or decrease borrowing, in the year ahead. This could impact expansion costs – or the timing of projects not already in motion.
Kinder Morgan Inc. (KMI), for example, said in January that its natural gas pipeline and storage business expanded substantially late in 2023 and that it is poised for continued growth in the year ahead. KMI expects to capitalize on strong natural gas production and expectations for exponential growth in export demand in the back half of the decade.
Natural gas production reached record highs above 106 Bcf/d late in 2023 and early this year. Producers ramped up in anticipation of several new liquefied natural gas export facilities opening along the U.S. Gulf Coast to supply global energy needs. The first of these could commence operations late this year with more to follow, driving long-term demand for U.S. gas. Projects already under construction could nearly double LNG capacity by the end of the decade. LNG demand has recently held around 14 Bcf/d.
KMI’s fourth-quarter revenues, however, were dragged down by weakened natural gas prices, and its full-year bottom line results were adversely impacted by higher interest rates on its debt. The company’s network is composed of 70,000 miles of pipelines that move about 40% of U.S. natural gas production, so it serves as an industry bellwether.
Price Potential
That noted, KMI executives anticipate that, following a relatively mild domestic weather last year, the potential for increased cooling demand this summer and mounting LNG calls later in the year could bolster prices and push Henry Hub futures to an average of $3.50/MMBtu for all of 2024. Prices in recent sessions hung close to the $2 level.
Cash prices are lower, too, though they have rallied at points this winter amid blasts of Artic air and production interruptions. NGI’s Spot Gas National Avg. reached an early 2024 high of $16.77 in the second week of January, more than five-fold higher than the lows of this week.
RBN Energy analyst Housley Carr agreed that, beyond this year, more investment will be needed to keep up with demand.
Prices are likely to mount in a rising demand environment. He said much of the coming change will be rooted in the new epicenter of the global LNG market: Texas and Louisiana.
“On top of the existing 12.5 Bcf/d of LNG export capacity in the two states, another 11-plus Bcf/d of additional capacity is planned by 2028. The good news is that the two major supply basins that will feed this LNG demand” —the Permian Basin and the Haynesville Shale— “will be growing, but unfortunately not quite as fast as LNG exports beyond 2024,” Carr said.
“And there’s another complication, namely that the two basins are hundreds of miles from the coastal LNG terminals, meaning that we’ll need to see lots of incremental pipeline capacity developed to move gas to the water,” he added.
To be sure, there is uncertainty on the timing of some future demand – given the Biden administration in January curtailed new federal export authorizations for LNG projects while the Department of Energy determines whether more capacity is in the public interest. But that does not impact projects underway.
Lower borrowing costs would help to facilitate the development of facilities and pipelines already in the works. That could prove especially important to accommodate the activity in the Permian and the Haynesville.
“On the Louisiana side, LNG exports are set to rise faster than production in the state, while in Texas, the pace of production growth generally matches the combo of LNG and Mexico exports for a few years.” But it “eventually lags behind as new LNG terminals come online, requiring the state to pull more gas in from Oklahoma or send less to Louisiana,” Carr said. “These developments will drive highly dynamic market conditions, with flow shifts that will impact price differentials, the need for new pipeline infrastructure, and the gas sourcing strategies for LNG exporters.”
