There are lots of discussions around the durability of higher energy prices and energy inflation is a central topic on some earnings conference calls and in many of our discussions with clients, especially those at chemical companies with the unfortunate task of having to prepare a 2022 budget, which of course includes a forecast of costs. We see continuing strain on the US and global natural gas system and, behind what will inevitably be some seasonal weather-related price volatility, a stronger market that could endure for years. The rate of addition of renewable power does not seem to be able to keep up with demand growth and replacement needs caused by some fossil fuel-based power plant closures around the World. Natural gas (LNG) is the natural plug-in replacement, and we continue to see underinvestment, relative to natural gas prices, as a consequence of ESG related pressure around capital spending. We would advise all clients to look at a 2022 scenario with natural gas, and oil higher than current levels.
Source: EIA – Winter Fuels Outlook, October 2021
The very high LNG prices give a significant marginal competitive advantage to countries and regions that are long natural gas, such as the US and the Middle East, and even if the LNG prices shown in the exhibit above moderate materially in 2022, US chemical producers with either a high methane cost component or high power component should benefit. We discuss energy and inflation more broadly in today's daily report.
