Workers operate a drilling rig for an EBR Energy LP natural gas well near Columbus, Texas.
Scott Dalton | Bloomberg | Getty Images
US natural gas prices have more than doubled since the start of the year, and this summer’s cooling season could push them up at least another 25%.
In the futures market, gasoline prices rose 4% on Tuesday as warm spring weather in the southern United States put pressure on a market already concerned about supply shortages. Warmer weather is expected to continue across the region.
“Over the past month, there has not been a significant uptick in production from the lower 48 U.S. states,” said Matt Palmer, senior director of North American natural gas at S&P Global Commodity Insights. “You see exports completely drying up on LNG; the energy consumption of the power sector is really strong and adding to the heat that we see and the expectation that the southern part of the continent in May and June will see temperatures well above normal. That’s a recipe for higher prices.”
Natural gas futures were trading at around $8.30 per million British thermal units (MMBtu), up 137% for the year. A heat wave is spreading across the South, with temperatures over 100 degrees in some places. High temperature records are expected to be tied or broken this week in Texas, Oklahoma and Louisiana, according to the National Weather Service.
Higher natural gas prices are hitting U.S. businesses and consumers at a time when gasoline and diesel fuel are at record highs. Palmer said utilities that normally switch to coal for power when natural gas prices rise find that coal is even more expensive — the equivalent of gas at $9 to $10 MMBtu.
“The likelihood of double-digit prices this summer is getting stronger by the day,” Palmer said.
As Russia’s invasion of Ukraine has pushed up gas prices in Europe, US prices have also risen. Russia supplied around a third of Europe’s gas.
US prices, however, are not directly linked to the world market, even though the country sends about 15% of its gas production abroad in the form of liquefied natural gas. European prices are around four times higher for LNG.
US production fell sharply during the pandemic, and although it restarted, it grew slowly. In February, monthly production was 115.2 billion cubic feet per day, compared to 118.7 BCF in December, according to the latest monthly data from the government.
“We will definitely go over $10. I would put $12 to $14 as the upper end,” said Again Capital partner John Kilduff. “It’s a commodity that trades a lot parabolically. It’s no stranger to parabolic up and down movements. It’s incredibly volatile, and it also has the ability to reset. We could get to 10 or $12 and if you have a cool August, then you might drop back below $8.”
Supply is tight on the US market. The amount of stored gas was at an unusually low level, and the cold spring weather followed by the heat wave created more demand than normal for this time of year. This made it more difficult to compile inventories. Some of the gas that would be set aside for next winter is used.
Kilduff said storage levels are 18% lower than last year and 16% lower than the five-year average. “Now you have the additional pressures from LNG exports that are significant,” he said. “By significant, I mean it prevents the United States from being oversupplied or at high levels of gas storage that would crush the price.”
Kilduff expects 90 BCF of gas to have been injected into storage last week. The Energy Information Administration releases its weekly supply report on Thursday.
“We’re starting in a big hole,” he said. “We have to be like squirrels tidying up acorns, and to the extent that we have a heat wave, that retards the flow and underpins the price. You have to see triple-digit injections.”
Warmer temperatures were expected, but Bespoke Weather said models “are becoming more adamant about the return of stronger heat as we end the month and head into at least early June”.
Bespoke said total gas demand over the next 15 days is expected to be above normal. “This is probably the base state we will have for the summer season, given the persistence of La Niña, where we are warmer than normal, with occasional variability that sometimes returns almost to normal,” said noted the company in its comments on Tuesday.
Analysts said the gas market is generally quiet at this time of year, but Kilduff said price action this week could be a harbinger of what summer could be like if the weather warmer than normal persists. He said the price of natural gas was also supported by developments last weekend, when the Texas Electric Reliability Board asked consumers to conserve power after six power plants unexpectedly failed.
Kilduff said power problems in Texas could affect oil and gas production if they recur or become persistent.
“Normally it’s a pretty quiet time for energy markets,” said Rob Thummel, senior portfolio manager at TortoiseEcofin. “May is usually pretty optimistic. … I guess it’s a first dose of summer. If we continue to see hot weather, it will probably have the same effect as extremely cold weather. It will have an impact . “
“Normally the release valve is coal. It’s just not there right now. … The consumer is kind of at the mercy of Mother Nature at this point for the summer,” he said. declared.
Thummel added that the futures market expects gas to remain in the $8 range for nearly a year before falling back below $5 next April. He said he considered the price too high, given the state of the industry.
“$5 probably better reflects the current environment. We probably have a geopolitical risk of $3 or more,” he said.
Thummel said U.S. production is growing and companies with pipelines such as Kinder Morgan are expanding capacity from the Permian Basin region in Texas.
The United States intends to send more natural gas to Europe to help compensate for the lack of Russian gas, but export and import capacities must be increased. Thummel said exports are expected to reach about 20% of US production over the next two years.
This should also help support US prices.
“Last year at this time, [the price] was below $3,” Kilduff said. “For the past two years, $1.50 was the lowest price you would get for a short period of time.