U.S. Natural Gas Prices Get Caught Up In Perfect Storm
U.S. natural gas prices have gone from cheap and range-bound to the highest in more than a decade in a matter of weeks. And they may still have higher to go as extra strong local demand combines with soaring exports to Europe.
Natural gas ended last week at over $8 per million British thermal units. It had started the year at below $4 per mmBtu, and analysts expected it to remain range-bound. But then the war in Ukraine threw all these expectations out of the window.
Exporting
The United States has been exporting as much natural gas as is physically possible, and more than half of this gas has been going to Europe as it scrambles to reduce its dependence on Russian oil, gas, and coal as quickly as it can.
Yet higher exports of natural gas have meant lower local supply, and this has naturally pushed prices higher. Now, the weather has joined Europe in doing just that.
Reuters noted in a report last week that unusually warm weather in parts of the United States is driving higher than usual demand for natural gas by power utilities as demand for cooling rises. That this fact has coincided with consistently high gas demand from overseas is quite unfortunate. Because normally, gas companies replenish stocks during the spring.
As things stand now, working natural gas in storage in the U.S. as of the last week of April is some 20 percent below last year’s level at this time of the year and 16 percent lower than the five-year average for the end of April, according to the Energy Information Administration.
Meanwhile, production has not been too quick to ramp up, CBS News reported last week, citing energy analysts. The pandemic, one of the analysts explained, killed many small gas producers while larger players in the field retrenched to protect their cash, very much like oil companies.
“That decline happened and ran its course just when the global economy started taking off last fall, and we’ve been whipsawed,” David Victor, an innovation and public policy professor from the UC at San Diego, told CBS News. “The demand is back, but supply is taking a while to catch up.”
While this happens, demand from exporters of liquefied natural gas is on a steady, strong rise. According to Refinitiv data cited by the Financial Times, this demand has averaged more than 12.3 billion cu ft daily since the start of March. This is 17 percent above what LNG exporters took in last year. For context, it is also almost equal to the total consumption of gas from the U.S. residential sector.
Prices
According to some, prices cannot stay where they are for very long. “These prices are unsustainably high,” Pavel Molchanov, an analyst with Raymond James, told CBW News. They are “definitely off-the-charts high, and that’s not going to persist forever.”
The problem with such forecasts is that they make sense theoretically. Yet as we have seen with oil prices, gas prices won’t simply collapse under their own weight. A decline in demand would be necessary to do that, and a decline in demand is nowhere on the horizon.
Some buyers of Russian gas in the European Union that have been paying for the commodity in euros or dollars are bracing for a cutoff by Gazprom as their contracts expire, and Russia has switched payments to rubles. If more countries follow the fate of Poland and Bulgaria, the price of gas will rise further, as would demand for alternative gas supplies, even though Poland, for one, continues to receive Russian gas—it just receives it from Germany rather than Russia itself.
Season
Then there is summer, which is just two months away for the northern hemisphere. Summer, like winter, is a top demand season in that hemisphere, especially in the warmer parts of the United States. What this means is that higher demand for exports will continue hand in hand with higher domestic demand. Gas prices may yet remain off the charts for a while.
Just how strong these tailwinds are was recently demonstrated by French utility Engie. Two years ago, the company suspended talks with NextEra on a long-term LNG supply contract because of emission concerns. Last month, the French utility sealed a 15-year deal with the U.S. LNG exporter.
More than one energy analyst has warned that emission concerns and long-term renewable energy plans in the European Union would act to discourage long-term LNG plans, but this doesn’t seem to have been the case so far. That’s perhaps the EU’s rush to diversify is rather urgent, and not a lot of thought is being put into long-term planning besides the agreement to steady U.S. gas supplies once the EU weans itself off Russian gas. And this will lend long-term support to U.S. gas prices.
About E. J. McKay
E.J.McKay is a Shanghai-headquartered investment bank with a special focus on mergers & acquisitions. We are one of the most long standing independent investment banks in China, with core business of mergers & acquisitions and financing advisory.