US natural gas futures rallied this fall to the highest in more than seven years, climbing well above $5/mmBtu, as surging LNG demand and modest production growth stoke concerns about winter supplies.
Gas futures prices often rise ahead of the 1 November start of the winter heating season as buyers gauge gas needs for those peak demand moths. But this year's increase to levels last reached in February 2014 came as a rude shock to consumers accustomed to the lower, stable prices that dominated the last several years. Prompt-month natural gas prices during the first half of last year languished below $2/mmBtu as exports dwindled and measures to slow the spread of Covid-19 chilled the economy.
"People who came into this market in the last eight or nine years do not realize how crazy it can get," said Stephen Schork, president of the energy consultancy Schork Group. Prices could continue to increase from here, he said.
US gas prices have historically been volatile, rising as cold weather boosted demand for home heating or as hurricane-related shut-ins in the US Gulf of Mexico curtailed supplies. Those rallies have occurred less often in the past decade as US gas producers moved away from the US Gulf to onshore regions to develop prolific shale fields.
Large gas producers, still reeling from last year's lower prices, have been reluctant to increase output even as prices rocketed higher this year, prioritizing debt repayment over production growth. Small increases in gas production this year have failed to keep pace with the booming demand, leaving US gas inventories at about 7pc lower than the five-year average as winter approaches.
Hurricane-related shut-ins in the US Gulf of Mexico in August and September further curtailed expected production.
Gas-fired power boon to bust
Last year's lower prices were a boon for electric utilities and manufactures that use gas to run plants. Demand for gas at power plants hit an all-time high last year of 31.7 Bcf/d (898mn m³/d), up by 2.6pc from a year earlier, according to the US Energy Information Administration (EIA).
The agency has said it expects power sector demand for gas to tumble this year as higher prices spur more utilities to dispatch coal-fired power. Power sector gas use this year was projected to average 29.1 Bcf/d, down by 8.3pc from 2020.
But that drop in power sector demand will be more than offset by the ramp-up in US LNG exports that averaged 9.6 Bcf/d during the first six months of this year, up by 42pc increase a year earlier, as demand in Europe and Asia picked up and last winter's cold depleted overseas stocks. EIA forecasts show LNG exports rising above 10 Bcf during this winter.
That increase in demand will leave less production available to meet winter heating needs and could strain low US gas inventories.
A "fear premium" is baked into prices right now, said Gelber & Associates analyst Daniel Myers, as low winter inventories raise alarms of potential supply shortfalls ahead of cold weather.
Injections, though, were expected to pick up as the market moves through October and could begin to move inventories closer to average levels. Large injections could put some downward pressure on gas prices in the coming weeks.
