Natural gas trading rallied yesterday, September 28, 2021, to as high of $6.280 during yesterday’s overnight trading. This pricing has not been seen since 2014.
Yesterday was also the last day of trading for the October 2021 contract. Yesterday’s natural gas trading closed at $5.841 per MMBtu, which is the October 2021 natural gas settlement price.
The rally in the natural gas market shows the extent of the volatility that we have been discussing. The natural gas price increase is also causing an increase in power prices not only in the U.S. but, also in Asia and Europe. There are various factors for this rally:
1. Supply and Demand– Record global gas prices continue to keep demand for U.S. liquefied natural gas exports (LNG) strong. Gas prices in Europe and Asia traded about four times over U.S. gas. Europe and Asia’s natural gas prices were as high as $29.00 per MMBtu versus $6.00 per MMBtu in the United States.
It is important to note that the U.S. is only able to export approximately 10% of our natural gas production as liquefied natural gas. There is a sixth liquefied natural gas train at Cheniere Energy Inc’s Sabine Pass and Venture Global LNG’s Calcasieu Pass in Louisiana that will start producing LNG in test mode later this year, but even with this new LNG export capacity, it should not be driving up our domestic gas prices like we are seeing. This could potentially be a price bubble.
2. Storage– The winter heating season is around the corner. Per the U.S. Energy Information Administration (eia.gov), for the week of September 17, 2021, the net injections into working natural gas totaled 76 billion cubic feet (Bcf). This injection was in line with the five-year average net injection of 74 Bcf and last year’s net injection of 70 Bcf for this same week. Working natural gas stocks totaled 3,082 Bcf, which is 229 Bcf lower than the five-year average and 589 Bcf lower than last year at this time.
The average rate of injection into natural gas storage is 13% lower than the five-year average so far in the refill season, which is April through October. Due to Covid, we have built up a larger five-year average in natural gas storage than a year ago at this time, where we were looking at a deficit of 20% + lower than the five year average.
3. Rate of Inflation – The forecasted rate of U.S. inflation is prepared by the International Monetary Fund. The International Monetary Fund projected an approximate 2.25% annual rise in the general level of prices until 2026. To put this into perspective, the projected annual rate of inflation has been as follows over the past 5 years:
4. Crude Oil Market – The crude oil market is also feeling the shortfall in global energy supplies. Brent crude oil, the global benchmark, almost hit $80.00 per barrel yesterday during early trading.
5. Weather – We are approaching cooler weather. This historically translates into an increased demand for natural gas.
Managing your risk and considering budget certainty are imperative during this volatile time. We will continue to monitor energy prices and assess the appropriate risks associated with the market.