The off-season is supposed to be here, and winter has not yet arrived. However, natural gas prices have soared in Europe over the past few months. In Europe, natural gas now cost six times more than one year ago.
A global energy crunch has sent natural gas prices skyrocketing in Europe, Asia, and the U.S. However, experts say natural gas prices will not rise as high in the United States.
Winter weather will have a significant impact on the outcome. Due to its world-leading position in natural gas production and higher inventory levels, the U.S. is better than Europe heading into the colder months.
At Bank of America Merrill Lynch, Francisco Blanch oversees global commodities, equity derivatives, and cross-asset quantitative investment strategies. “All energy prices are increasing right now,” he said.
That doesn’t mean U.S. prices won’t fluctuate. On Tuesday, natural gas futures settled at their highest level since December 2008. Wednesday, the contract was trading at $6.46 per million British thermal units (MMBtu).
While natural gas for November delivery has since slipped from those levels, it’s still poised to rise for the seventh straight week. At present, the price of MMBtu is around $5.63, more than double where it was two months ago.
It is far more extreme when it comes to moving abroad. Deutsche Bank analysts noted that in Europe, prices are up fivefold, while in the United States and Asia, prices are about 1.5 times higher. Natural gas prices have spiked in Europe as if oil were trading around $200 per barrel.
According to the firm, the importance of these changes to inflation, growth, and external accounts ought not to go unnoticed. Prices have moved significantly.”
Similarly, oil and coal prices have risen significantly. Brent crude traded at its highest level since 2018. West Texas Intermediate crude futures, the U.S. benchmark for oil, topped $80 per barrel on Friday for the first time since November 2014.
While Brent crude traded at its highest levels since 2018, West Texas Intermediate crude traded lowest since October. In high gas prices, utilities might even switch to oil instead of natural gas.
What led to the price increase?
The price spike in natural gas and commodities such as oil and coal, in general, is fueled by several factors.
Economy and consumer activity are returning to pre-pandemic levels as demand is rebounding. In the meantime, producers have been slow to increase production after the unprecedented downturn of 2020.
Due to a colder and longer winter than expected in 2020, European inventory levels were below average heading into the fall. Furthermore, wind speeds were slow, and temperatures were dry, which decreased renewable energy production.
In addition to the price of carbon offsets, many coal-fired plants have shut down, meaning everyone is vying for the same natural gas supply.
The continent now relies on Russian gas imports due to a decline in gas production over the past two decades. In what some critics call a politically motivated move, Russia has limited supplies to Europe this year.
However, this week President Vladimir Putin said Russia could boost output to ease the European burden.
The need for supplies is not limited to Europe. Asia’s demand for coal is soaring as countries like China seek to reduce their reliance on coal. There are cases where cargoes bypass Europe in favor of Asia, where the prices are better.
This confluence of factors has been described as a “perfect storm” by the Oxford Institute for Energy Studies.
What about in the U.S.?
Increasing energy prices and fuel shortages in Europe and Asia are unlikely to l were left lead to the same price hikes and deficiencies in the U.S., as was evident last winter when millions of people were in the dark for days.
Robert Thummel, managing director of TortoiseEcofin, said that there is no need to rely on outside suppliers, Europe’s problem. Specifically for liquified natural gas, he said the shortage is not caused by a lack of supply but by a lack of infrastructure.
JPMorgan raised its 2022 annual average price forecast by $1.70 MMBtu to $4.81 MMBtu in a note titled “Unthinkable upside, limited downside.”
The company noted that it is unusual to adjust forecasts right before winter weather reports are released; however, in this case, it makes sense. Due to the current risks threatening the balance of payments, analysts say there was a “complete need” to adjust forecasts.
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