Why Natural Gas Prices Are Rising This Year

Recently, natural gas prices have hit multi-year highs both in the United States and Europe. What’s behind this move?

Natural Gas Inventories Are At Low Levels

According to the recent EIA Natural Gas Storage Report, U.S. natural gas inventories are down by 6.9% compared to the 5-year average. The situation is even more tense in some European countries. According to Celsius Energy, Germany’s natural gas inventories are down by as much as 26% from the 5-year average.

Natural Gas Supplies Are Limited

In the U.S., natural gas production suffered from long-term troubles of shale producers. In the previous decade, these producers have burnt a lot of cash as the flooded the market with natural gas, keeping prices low. The beginning of the coronavirus pandemic has dealt a blow to energy demand, so these producers became more cautious and prioritized cash flows over production. Recent Hurricane Ida had an additional negative impact on natural gas production in the U.S.

In Europe, EU countries kept their natural gas inventories low after the previous cold winter. In addition, EU prioritized energy transition to renewable energy and was not ready to increase production or imports of natural gas. Some maintenance works in Norway have put additional pressure on production while wind farms failed to close the energy gap. More, Russia’s Gazprom did not answer EU calls for more supplies as it preferred to wait for the start of the gas transit through Nord Stream 2.

Meanwhile, China faced energy shortage which has already led to factory shutdowns. In this situation, China is hungry for any energy it can get, be it oil, natural gas or coal. Thus, there are limited opportunities to transfer natural gas from one parts of the world to others as almost everyone is trying to increase their natural gas supplies.

Winter Is Coming

The biggest concern for natural gas consumers is that the current shortage occurred before the winter in the Northern Hemisphere. When winter comes, demand for natural gas will increase, which will put even more pressure on consumers. Countries try to prepare for the winter, but boosting inventories is an extremely challenging task in the current market environment.

What’s Next For Natural Gas Prices?

Winter weather will serve as the key catalyst. If we have cold winter in the Northern Hemisphere, prices may skyrocket and shutdowns may occur. It remains to be seen whether producers will be able to increase production at a sufficient pace. In the U.S., the outcome of this story depends on shale producers which can be flexible and may increase production at a fast pace. In Europe, the situation is tenser as Europe depends on Gazprom. Gazprom is fulfilling its current contract obligations, but it will have to do more to help Europe solve its energy problems ahead of winter, while Europe’s options to boost its supplies without asking for Gazprom’s help appear to be limited.

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