Potential US rail strike threatens coal supply logistics, gas demand forecasts

Growing demand for natural gas in the US power sector is supporting record-high forecasts for year-long gas consumption, but a looming rail strike could drive up demand even further than previously expected if coal-by-rail supplies are interrupted.

The US Energy Information Administration forecast in its latest Short-Term Energy Outlook that US end users would consume 86.6 Bcf/d in gas across 2022, a record-high, with gas power burns up this year due in part to retirements of coal-fired plants once crucial to the US energy mix.

But a potential strike among workers in the US railroad sector is threatening to complicate coal deliveries and jolt those gas power burns even higher as coal-dependent utilities are forced to switch to gas. Six US rail carriers are continuing negotiations this week with labor unions to avoid a possible strike that would likely curtail shipments of many commodities across the country, including coal, with working hours and pay among the issues under dispute.

Any potential interruption to coal-by-rail deliveries will likely have bullish implications for gas demand for US utilities, many of which still rely on coal as an important component of the power generation mix. US utilities consumed 31.9 million st of coal in June, led by utilities in Missouri (2.6 million st), Indiana (2.3 million st) and Texas (2.2 million st), according to latest data from the EIA, which estimates that more than 70% of all coal deliveries to power generators in the US are handled by rail. Coal accounted for 21.8% of all power generation in the US in 2021, according to the EIA.

One union, the International Association of Machinists and Aerospace Workers, said Sept. 14 that it had rejected the latest proposed bargaining agreement from the National Carriers' Conference Committee, a major railroad association, and authorized a strike to begin later this month. Other unions continue to bargain with railroad carriers to avoid a stoppage, which could occur as soon as Sept. 16.

Price impacts

The ongoing rail negotiations have helped lift flagging US gas futures prices, as looming supply concerns intensify. The NYMEX Henry Hub October contract leapt 83 cents to settle at $9.114/MMBtu in Sept. 14 trading, data from CME Group shows. The Sept. 14 gains brought the prompt-month contract to a two-week high, after expectations of cooler autumnal weather and lower gas-fired power demand had softened the contract to sink below $8/MMBtu for Sept. 7-9.

Typically, power sector demand weakens substantially between late August and early September as air-conditioners are switched off amid milder temperatures. S&P Global data shows that daily gas-fired power demand in 2021 dropped 8.7 Bcf/d, or 21%, from the last week of August to the first week of September.

As a result, September usually features some of the largest weekly builds of the annual injection season, according to historical data from the EIA. An interruption in coal deliveries to power plants, such as the rail strike might bring, would likely prompt utilities to ramp up gas generation at a crucial time in the injection season, widening a persistent ongoing deficit for US gas storage levels to the five-year average.

The threat to upcoming storage builds helped the price rally extend further down the forward curve, with the November – February contracts all gaining around 80-85 cents to settle above $9/MMBtu on Sept. 14 as well.

LNG demand secure

While LNG operators in the US Gulf Coast are likely monitoring how the potential rail stoppage could impact gas fundamentals, it is unlikely that any coal supply interruptions would reverberate into LNG export markets.

"If coal fired generation were to be restricted, there would be a stronger call on natural gas by power generators, thereby raising the price of feedgas for LNG export facilities," says Ross Wyeno, lead analyst, Americas LNG, S&P Global Commodity Insights. "However, given the exceptionally robust global pricing environment, Henry Hub natural gas prices would need to rise by another $30-$35/MMBtu to incentivize LNG shut-ins, which remains a highly unlikely scenario."

S&P Global forecasts LNG feedgas demand will total 12.07 Bcf/d across 2022, up from 10.7 Bcf/d a year ago and a potential record annual high. But S&P Global recently "tempered back" its US LNG export forecast over risks that the Freeport LNG terminal along the coast of Texas will not hit a reported target to re-start operations this November, as well as regulatory issues LNG exporter Cheniere faces regarding emissions from its US Gulf Coast terminals, Wyeno said Sept. 14.