August 2022 – Energy Report

The changes in the energy market this August included an increase in electricity and natural gas prices and a piece of new legislation to reduce inflation and help with climate change. Energy prices continued to climb in August thanks to the strong demand for electricity and return of the Freeport LNG terminal to normal operations sooner than expected. Despite high natural gas prices in 2022, the Henry Hub price for natural gas is expected to average $7.54/MMBtu in the second half of 2022 and drop to $5.10/MMBtu in 2023. With demand for natural gas exceeding supply, inventories are at an all-time low, driving up the prices to all-time highs. The rising price of natural gas caused a spike in electricity prices this year because of its use in generating power.

This year U.S. natural gas inventories have less in storage than previous years. At the end of July, U.S. natural gas inventories had 2.5 Tcf in storage, 12% lower than the five-year average. By the end of October, or the end of the injection season, it is expected that natural gas inventories would reach 3.5 Tcf in storage, 6% lower than the five-year average. The EIA forecasts that LNG exports will average 10.0 Bcf/d in the third quarter of 2022 and 11.2 Bcf/d for all of 2022, a 14% increase from 2021 (EIA, 2022). In the first half of 2022 the U.S. became the largest LNG exporter in the world with nearly 70 percent of its exports going to Europe. The U.S. natural gas exports increased by 12 percent compared to the second half of 2021. The increase in LNG capacity, raised international natural gas and LNG prices, and higher global demand all contributed to the spike in exports from the U.S. Exports from the U.S. are expected to increase from 11.2 Bcf/d to 12.7 Bcf/d in 2023. Since Europe reduced their imports of LNG from Russia, over the past 5-6 months, 64 percent or 7.3 Bcf/d of U.S. LNG exports went to Europe.

The U.S. natural gas consumption is up by 3% with the 2022 forecast predicting averages of 85.2 Bcf/d an increase of 3% from 2021. The increase in price from the demand spike for natural gas resulted in an increase in electricity demand because of limited switching from natural gas-powered generators to coal-powered generators. Rising temperature in the U.S. and rising economic activity are also contributing to the rising prices of electricity. Electricity generation is coming from renewable energy sources such as solar and wind which provided 22% of the U.S. generation throughout 2022. Prices for electricity have increased by 6.1% to an average 14.6 cents per kWh in 2022. The annual wholesale average electricity price in the ISO New England and New York Markets is $95/MWh. Another factor that plays a role in the rising energy prices is inflation, or the overall increase in prices. The Inflation Reduction Act of 2022 released on Wednesday, July 27, 2022, by Sen. Schumer and Sen Manchin contains a set of provisions to promote clean energy production, addresses climate change, and facilitates domestic energy production. The Inflation Reduction Act protects ratepayers from volatility in natural gas prices because electricity rates are expected to decrease despite high natural gas prices. According to Resources for the Future the retail price of electricity is expected to drop 5.2-6.7 percent over the next decade. This will end up saving consumers a total of $209-278 billion. With more buildings and households becoming more energy efficient, emission drops of 69.8 percent to 74.9 percent below 2005 levels are expected by 2030.

Greenhouse emissions are expected to be reduced by 1 gigaton by 2030.

The energy outlook is hopeful for 2023 and depending on the severity of the winter weather, international issues, and market conditions we can see price drops as soon as the first half of 2023 where F&D Partners will recommend a different pricing strategy.

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F&D Partners is one of the leading energy consultant and engineering firms in the deregulated market, established in July of 2015 and is based in New York City. We currently manage the energy for 1,500 clients in nearly 20 states and five Canadian provinces. We work to find the most competitive prices for electric and natural gas in the market to save our clients up to 40% on their energy bills. 

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Over the past month, natural gas prices went down because of the closing of the Freeport liquified natural gas export terminal in Texas. The closing of the terminal eliminated much of the foreign demand for natural gas but also increased the reliance of the U.S. on imports. With the explosion at the Oneok liquified natural gas facility during the first week of July, the consequences are predicted to be minimal if natural gas is rerouted to one of the nine other processing plants they own.

As of Monday, July 11th, natural gas prices increased by 8.72 percent because of heat predictions for most areas in the U.S. These predictions resulted in increased air conditioning demand. The increased demand was met with supply issues because of the reduced amount of natural gas in storage this year (EIA, 2022). This year natural gas inventories are 12.2 percent below the seasonal average. On the week ending on July 6th, eighteen vessels left the US carrying 71 Bcf of liquified natural gas.

Net injections into the storage totaled 60 Bcf for the week ending on July 1st. Compared with the five-year average net injections of 60 Bcf and last year’s injections of 25Bcf during the same week, working natural gas stocks totaled 2,311 Bcf, which is 322 Bcf lower than the five-year average and 261 Bcf lower than this time last year (EIA, 2022).

Over the past twelve months, the average monthly spot prices have more than doubled, with natural gas prices increasing by $3.86 per million British thermal units because of low inventory levels coupled with high demand. The shutdown of the Freeport liquified natural gas terminal caused supply and demand to become more balanced resulting in a 40% decrease in the price of liquified natural gas from June 8th to July 6th.

According to the U.S. Energy Information Administration, the forecast for the summer of 2022 includes retail sales of electricity to be 0.4% higher than last summer. This growth is a result of increased electricity sales to the commercial and industrial sectors, representing continued economic recovery from the pandemic. The forecast also predicts that the U.S. residential sector sales of electricity will fall 2.0% during the summer of 2022. The usage of a typical residential customer will average 1,050 kWh per month between June and August 2022, which would be 2.9% lower than in 2021 (US Department of Energy, 2022). The forecast for lower electricity usage is a result of the idea that the summer will be milder than last year. The forecast was proven to be incorrect when a heat wave hit the states in mid-July, thus increasing demand and casing the price of natural gas to rise by 7 percent. The average gas output in the lower 48 states in the U.S. rose to 96.2 bcfd so far in July from 95.3 bcfd in June. It is expected that the US electric power sector will generate 1,150 billion kWh of energy this summer, which is about the same as last summer. The cost of natural gas delivered to power generators will average $8.81/MMbtu during the summer of 2022, an increase of 124% from last summer. The increased gas prices have a direct correlation between the inflexibility in gas-to-coal switching for power generation along with constraints on increasing natural gas production.

The continuation of the war in Ukraine has resulted in supply issues for natural gas in many countries. The war put more stress on the economy while it was recovering from the pandemic because of supply chain disruptions, weak investment in energy production, and a rapid rebound in global demand. The global rise in inflation resulted sharp increase in prices over the past year, making it harder to obtain natural gas in large quantities. In 2019 the United States stopped importing petroleum gases from Russia (Roberts, 2022). This choice means that the ban of Russian energy imports did not directly affect natural gas prices in the U.S. The decreased production of energy during the pandemic negatively affected the U.S. because prices skyrocketed when demand rapidly began to increase. When the world began to open again the supply of energy was high because of the decrease in demand during the pandemic. After some time, the natural gas in storage became depleted when people returned to work and industries opened. This caused prices to rapidly increase along with demand.