Natural gas prices are skyrocketing around the world. Meaning for the United States

Texas News Today

Point of Isle Gas Terminal at Tarakere, Wales, September 20, 2021.

Christopher Furlong | Getty Images

The global energy crisis has caused natural gas prices in the UK, Europe and Asia to skyrocket and reach record highs. However, experts say the stratospheric prices found in Europe are unlikely to carry over into the United States.

Many ultimately depend on what the winter season brings. However, the United States is the world’s largest producer of natural gas and is in a better position during the colder months, given that inventory levels are not as low as Europe.

Francisco Blanche, Bank of America Merrill Lynch’s head of quantitative investment strategy for global commodities, equity derivatives and cross-assets, told CNBC last week: “The United States is far more isolated from this global energy trend than the rest of the world,” he said.

This does not mean that US prices are not fluctuating. Natural gas futures on Tuesday closed at their highest level since December 2008. Wednesday’s deal rose to $6.466 per British thermal unit (mmBtu).

Since then, natural gas delivered in November has fallen below that level, but it is on track for a seventh straight week of growth. Currently, the deal is trading at around $5.63 per mmBtu. This is more than double the price at the beginning of the year.

However, the movement abroad is far more extreme. Analysts at Deutsche Bank pointed out that prices in Europe have risen five-fold, while prices in the United States and Asia have risen 1.5-fold. In Europe, a jump in natural gas prices is roughly equivalent to trading oil at $200 a barrel.

“We should not underestimate the importance of these moves in inflation, growth and external accounts,” the company wrote in a note to its clients. “These price fluctuations are a big problem.”

Coal and oil prices are also skyrocketing. West Texas Intermediate crude oil futures, the US oil benchmark, rose above $80 a barrel on Friday for the first time since November 2014. Meanwhile, international benchmark Brent crude traded at its highest level since 2018. A utility that replaces fuel with oil. .

Why are prices rising?

More generally, a number of factors have driven higher prices for commodities such as natural gas, oil and coal.

Demand is improving as the economy returns to business and consumers return to pre-pandemic activity. At the same time, manufacturers facing the unprecedented recession of 2020 are lagging behind in increasing production.

Inventories in Europe were below average for the fall, as the 2020 winter was colder than expected and longer than expected. In addition, slow wind speeds and dry conditions affected the energy production of renewable energy. Carbon offsets are expensive and the continent has moved away from coal-fired power plants. In short, everyone was suddenly vying for natural gas.

European gas production has declined over the past two decades and the continent is now dependent on imports from Russia. President Vladimir Putin said this week that Russia could increase production to ease tensions in Europe, but this year the country has restricted supplies to Europe, a so-called politically motivated move.

Europe is not the only country in need of supplies. Demand is skyrocketing in Asia as countries, including China, try to wean away from their dependence on coal. In some cases, freight is leaving Europe for Asia where better prices can be obtained.

The Oxford Institute for Energy Studies summarized the confluence of these factors and reported that it was making “this perfect storm”.

How in America?

The United States has its own electricity problems, but Europe and Asia have similar price hikes and energy crises, as demonstrated in Texas, where millions of customers were in the dark last winter. it’s unlikely.

“”[The U.S.] Robert Thumel, managing director of Tortoise Ecofin, said the reduction was not due to shortages, but to shortages. Due to the lack of infrastructure – especially for liquefied natural gas.

“You won’t see the American defense here because neither the US nor the European side, and most importantly, the Asian side, has enough infrastructure to resolve this,” he said. added.

Ultimately, Thumel said that all natural gas price forecasts depend on the weather. Prices may remain slightly higher, between $3 and $4 in a typical winter, but drop to between $2.50 and $3 in warmer than expected temperatures. Conversely, when temperatures drop, prices can skyrocket to double digits.

Although the United States is in a better position than Europe, which is heading into winter, such volatile fluctuations in foreign energy markets have a chain effect around the world. This week, Credit Suisse raised its fourth-quarter price forecast from 3.50 mmBtu to 5.75 mmBtu by more than 60%.

“Short-term settings for winter stocks and increasingly tighter fundamentals of global demand have proven to be faster than we expected,” the company said in a note to its clients. wrote. The new target is higher than the average price in recent years, but still below natural gas’s $6 level last week.

Meanwhile, JPMorgan raised its 2022 average annual price forecast from 1.70 MMBtu to 4.81 MMBtu, titled “Unthinkable Upward, Limited Downward.” The company pointed out, of course, that it is not common to adjust forecasts just before winter weather forecasts are available. But this time it was guaranteed. Analysts said there was an “absolute need” to adjust forecasts given the “risks affecting this balance at this time”.

“We go where the US supply and demand balance takes us, and it takes us places we haven’t been in a long time,” the company said. In the current quarter, JP Morgan expects an average price of 5.50 MMBtu, which will bring an average price of 3.65 MMBtu in 2021.

While the energy crisis is likely to be the main driver of price action, some volatility has forced Wall Street companies to short futures in large rallies and then cover their positions. There is also a possibility.

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