The Point of Ayr gas terminal in Talacre, Wales on September 20, 2021.
Christophe Furlong | Getty Images
A global energy crisis is pushing natural gas prices in the UK, Europe and Asia to record highs. However, experts say the stratospheric prices seen in Europe are unlikely to spill over to the United States.
Much will ultimately depend on what winter brings. But the United States is better positioned as the colder months approach, given that it is the world’s largest producer of natural gas and inventory levels are not as depleted as in Europe.
“We are at a unique moment in time when all energy prices are rising,” said Francisco Blanch, head of global commodities, equity derivatives and quantitative multi-asset investment strategies last week. at Bank of America Merrill Lynch, on CNBC. “The exchange.” “The United States is much more isolated from this global energy trend than the rest of the world,” he added.
That’s not to say that US prices won’t be volatile. Natural gas futures on Tuesday were at their highest level since December 2008. On Wednesday, the contract traded at $ 6.466 per million British thermal units (MMBtu).
Natural gas for November delivery has since declined from that level, but is still on track for a seventh straight week of gains. The contract is currently trading around $ 5.63 per MMBtu, which is more than double the prices at the start of the year.
But travel abroad is much more extreme. Deutsche Bank analysts noted that in Europe prices have quintupled, while in the United States and Asia prices are around 1.5 times higher. In Europe, the surge in natural gas prices is equivalent to if oil was trading around $ 200 a barrel.
“The importance of these movements on inflation, growth and external accounts should not be underestimated,” the firm wrote in a note to clients. “These price movements are a big problem.”
Coal and oil prices are also rising. Futures on West Texas Intermediate crude, the benchmark of US oil, exceeded $ 80 a barrel on Friday for the first time since November 2014. International benchmark Brent, meanwhile, traded at its highest level since 2018. Analysts say high natural gas prices could even prompt utilities to swap fuel for oil.
Why are the prices jumping?
Several factors are fueling soaring prices for natural gas and commodities such as petroleum and coal more generally.
Demand is rebounding as economies resume operations and consumers resume their pre-pandemic activities. At the same time, producers, who suffered from the unprecedented slowdown in 2020, have been slow to increase production.
A colder and longer-than-expected winter 2020 meant European inventory levels were below average as autumn approached. On top of that, slow wind speeds and dry conditions weighed on the production of renewable energy. Carbon offsets are expensive, and the continent has moved away from coal-fired power plants, meaning everyone was suddenly competing for natural gas.
Europe’s gas production has declined over the past two decades and the continent is now dependent on imports from Russia. The country has limited supplies to Europe this year in what some have called a political decision, although this week President Vladimir Putin said Russia could increase production in an attempt to ease the pressure in Europe.
Europe is not the only one in need of supplies. Asian demand is surging as countries including China seek to abandon their dependence on coal. In some cases, cargoes bypass Europe for Asia, where they can get better prices.
The Oxford Institute for Energy Studies summed up this confluence of factors, noting that it creates “this perfect storm.”
And in the United States?
While the United States has its own power issues, as shown In Texas last winter, when millions of customers were left in the dark for several days, the same price hikes and energy crisis are unlikely to occur in Europe and Asia.
“[The U.S.] didn’t have to depend on the rest of the world for supplies, and that’s really Europe’s problem, ”said Robert Thummel, Managing Director of TortoiseEcofin. He noted that the shortage is not due to a lack of supply, but rather a lack of infrastructure – especially for liquefied natural gas.
“You are not going to see the United States to the rescue here, because there is simply not enough infrastructure on either side – the American side or the European side and especially the Asian side – to solve this problem. “, he added.
Ultimately, Thummel said his forecast for natural gas prices all hinged on the weather. A normal winter could see prices stay slightly elevated in the $ 3 to $ 4 range, while warmer-than-expected temperatures could drop to between $ 2.50 and $ 3. On the other hand, if temperatures drop, prices could hit double digits.
While the United States is in a better position than Europe as winter approaches, such sharp swings in overseas energy markets have cascading effects around the world. This week, Credit Suisse raised its price guidance for the fourth quarter by more than 60% from $ 3.50 MMBtu to $ 5.75 MMBtu.
“The short-term configuration of winter storage inventories and the increasingly tight fundamentals of global demand have turned out to be more bullish than we expected,” the company wrote in a note to customers. While the new target is high relative to average prices in recent years, it is still below the $ 6 natural gas level crossed last week.
JPMorgan, meanwhile, raised its 2022 annual average price forecast from $ 1.70 MMBtu to $ 4.81 MMBtu in a note titled “Unthinkable increase, limited downside.” The firm stressed that it is atypical to adjust the forecast just before winter weather reports are available. But this time it was justified. Analysts said there was an “absolute need” to adjust the forecast given the “risks to this balance right now”.
“We are going where the balance of supply and demand in the United States takes us, and it has taken us to a place that has not been visited in quite some time,” the company said. For the current quarter, JPMorgan is considering average prices of 5.50 MMBtu, which would bring the 2021 average price to 3.65 MMBtu.
While the energy crisis is likely the main driver of price action, some of the volatility could also come from companies on Wall Street selling futures on the massive rally and subsequently being forced to hedge their positions.
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