The steep and steady increase in energy prices continues. Energy prices are skyrocketing. There is no other way to say it.
Yesterday, the U.S. Energy Information Administration (eia.gov), stated that natural gas prices are likely to remain elevated through the winter. Their forecast is that between October 2021 and March 2022, the Henry Hub natural gas prices will average $5.67/MMBTu. This will be the highest winter price since 2007-2008. Yesterday, October 14, 2021, the November 2021 NYMEX natural gas futures settled at $5.687/MMBtu. Our concern is that the eia.gov’s prediction of winter pricing may be too low. The eia.gov also predicts a decrease in pricing after the first quarter of 2022. However, a cold winter will influence this prediction.
There are several reasons why energy prices are rising. Below are a few of those reasons:
1) Global Supply and Demand – The demand for energy has increased globally as the global economy recovers from the pandemic. Just in the United States alone, natural gas prices have more than doubled since this time last year. Wholesale prices for natural gas in Europe and Asia are more than five times what they were a year ago.
2) Crude Oil Prices – You have probably already heard the phrase “pain at the pump”. You feel the pain in your wallet when you fill up your vehicle with gasoline since those prices are also rising. The recent increase in gasoline prices reflects the increasing crude oil prices. The world’s biggest independent oil trader, the Vitol Group, said that it expected global demand for crude to increase by 500,000 barrels a day this winter. As of this morning, both WTI and Brent crude was trading at over $80.00 per barrel.
3) Natural Gas Storage – There is less natural gas on the market. As of the end of September 2021, the U.S. Energy Information Administration estimates that the total U.S. natural gas inventories are 5.5% below the five-year average. The U.S. Energy Information Administration forecasted that on November 1, 2021, which is the beginning of the heating season, natural gas storage would be at 3,572 Bcf, which equates to 4.8% below the five-year average. According to the National Energy Assistance Directors Association, natural gas bills could increase as much as 30% for this winter.
4) U.S. Exports of LNG (liquefied natural gas) – U.S. LNG exports have grown faster than domestic natural gas production, which has led to lower than average inventory. Europe and Asia’s power companies are driving up LNG pricing due to a bidding war over shiploads of LNG. S&P Global Platts has noted that in Japan, Pakistan, Bangladesh, Taiwan and Indonesia, prices for LNG are so high that these countries power companies will likely burn oil instead of LNG. This will generate more carbon dioxide emissions than burning natural gas.
5) Inflation – Unfortunately, no one is immune to recent inflation. Whether you are buying eggs and bacon or even items for the upcoming holidays, you have to pay more. The increase in energy prices is playing a part in the increase of those prices.
6) Weather – Weather is always a factor in energy prices. If the United States experiences a severe cold snap (such as the polar vortex), that would drive down natural gas storage and increase natural gas prices even more than they are increasing currently.
There are also several reasons to be concerned about energy prices and the increases we are all feeling. We strongly recommend that you speak with your Muirfield Energy Advisor about the state of today’s energy market.