By Michael Kern
Weather forecasts are among the biggest factors driving natural gas prices, especially during the winter when heating demand is at its peak. At the same time, weather forecasts are notoriously unreliable beyond a certain point. As a result, natural gas prices have seen some sharp movements in the last few days and are likely to see extra volatility in the runup to the holidays.
December has turned out warmer than expected, and that has dampened prices somewhat. But uncertainty about January remains as traders exit their positions and go home for the holidays. At the same time, a tight supply situation per the latest EIA gas inventory report is keeping the upside risk substantial, too, adding to volatility.
An additional factor that is moving natural gas prices in the United States is the price—and supply—situation in Europe. Since September, the continent has been teetering on the brink of a gas shortage with prices breaking record after record, providing a major boost to U.S. gas exports and prompting Senator Elizabeth Warren to lash out at exporting companies accusing them of profiteering instead of keeping the gas for American consumers.
There seems to be enough gas for the domestic market, however, so for the United States, the fundamentals situation is not as dramatic as it is for the EU, where reserves are already at the 5-percent mark when there are still two more months of winter. The outlook is bullish, too. The Energy Information Administration expects U.S. natural gas production to hit a new record next year.
By December 2022, the EIA said, it expects dry natural gas production to increase to 97.5 billion cu ft daily. That would be up from 95.1 billion cu ft daily in October this year, the agency said. By the way, the October production figure is already a substantial increase on the low of 87.3 billion cu m from May 2020 when the pandemic began to claim oil and gas production amid demand destruction.
The increase in production would come from pure-play gas drillers and from oil drillers as well, as they produce a lot of associated gas during oil extraction. As oil drilling increases, the EIA explained in the latest edition of its Short-Term Energy Outlook, so will gas production when the wells are put into operation.
Even with this production increase, however, the United States is consuming more natural gas than it produces. According to data from Refinitiv cited by Reuters last week, demand for natural gas in the U.S., including exports, will reach 118.2 billion cu ft this week, up from 109.4 billion cu ft last week as the weather gets colder.
At the same time, the report cited analysts who pointed to the currently milder than usual weather that would allow utilities to build their inventories and reach above-average levels in a week or two if the weather remains mild. This would be the first above-average storage level since April this year, Reuters noted.
Inventory levels certainly have an effect on prices, and it is a quick effect, just like the one of weather forecasts. Still, U.S. natural gas prices remain radically lower than the average in both Europe and Asia: in Asia, the average price per million British thermal units is about $36, while in Europe, this figure rises to $41. In the United States, natural gas is trading at about $4 per mmBtu.
It’s worth noting there that although this state of price affairs is certainly motivating for higher LNG exports, the potential worry that excessive exports could raise prices for American consumers considerably is unfounded, at least on fundamental grounds. The total U.S. LNG exports capacity stands at some 12 billion cu ft daily, and currently, exports are running at 11.8 billion cu ft daily.