United States natural gas futures has soared over the past month as supply disruptions amid high demand and low inventories have pushed commodity prices higher.
The flow of Russian gas to Europe is currently at a 40-year low as the EU plans to reduce its dependence on Russian imports. Additionally, the ongoing outage at Freeport, the United States’ second-largest liquefied natural gas (LNG) export facility, is raising concerns about market supply.
The Freeport facility was closed on June 8 after an accident, the company reached an agreement with the Pipeline Hazardous Materials Safety Administration (PHMSA) to resume partial operation in October.
First-month Henry Hub natural gas futures traded on the New York Mercantile Exchange (NYMEX) rose to $8.868 per million British thermal units (MMBtu), up 40% from the previous month.
The NYMEX September contract hit a high of $8.874/MMBtu on August 11, although the price has since fallen slightly, remaining around 14 years.
Historical Performance of Natural Gas Futures
The price of natural gas has hit new multi-year highs since March as sanctions on Russia following the country’s February 24 invasion of Ukraine led to a ban on oil imports, Russian coal and gas in much of the world.
According to the International Energy Agency (IEA), Russia is one of the world’s top three producers of crude oil and the second largest producer of natural gas after the United States. Oil and natural gas revenues accounted for 45% of Russia’s federal budget in 2021.
Sanctions against Russia and the resulting impact on the country’s exports led to volatility in spot gas prices globally, particularly in Europe, which was heavily dependent on Russian gas.
As a result, the price of natural gas in the United States rose for most of the year and hit a 14-year high of 9.34 MMBtu on June 6. The last time the US natural gas futures price topped $9/MMBtu was in June 2008, when the commodity briefly peaked at $13.45/MMBtu, according to NYMEX data.
Prior to 2022, natural gas spot prices were below $4/MMBtu in the first half of 2021 before briefly recovering to $6/MMBtu, but ended the year below $4/MMBtu.
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What are natural gas futures contracts?
The NYMEX natural gas contract in the United States is the reference price in the country. The benchmark price is also known as the Henry Hub, named after a gas pipeline in Louisiana, which serves as a delivery point for NYMEX contracts.
According to NYMEX, Henry Hub natural gas futures are the third largest physical commodity futures contract in the world by trading volume. NYMEX futures contracts are closely tied to spot natural gas prices, reducing potential arbitrage between the two markets.
Trades for gas spot prices are made daily off-exchange during weekdays, with buyers and sellers guaranteeing volume at physical market prices one day before delivery. In contrast, the specification of the futures contract is for forward delivery with a minimum contract unit of 10,000 MMBtu.
EU imports record volume of US LNG
In the past, Europe has relied heavily on Russian natural gas, accounting for around 45% of total EU imports.
With Russia limiting the flow of gas through pipelines, Russian exports to Europe have plunged to a nearly 40-year low. According to data from the US Energy Information Administration (EIA), Russian exports of natural gas through pipelines to the EU and the UK fell by almost 40% in the first seven months of 2022, compared to the same period last year.
Russia’s average gas exports to the EU and UK fell to 1.2 billion cubic feet per day (Bcf/d) in mid-July, down from the 10 average, 9 Bcf/d in 2021 and 12.4 Bcf/d in 2020 and 16.0 Bcf/d in 2019, EIA reports Aug. 9.
“To compensate for declining gas pipeline exports from Russia, the EU and the UK have been importing record volumes of liquefied natural gas (LNG) this year, particularly from the US,” the EIA said.
According to the US Department of Energy, Europe accounted for 64% of US LNG exports from January to May 2022, compared to 32% in the same period of 2021.
Strong demand for US LNG exports supported natural gas prices. Additionally, above-normal temperatures across much of the United States have led to increased demand for gas-fired power generation.
Natural gas prices are linked to weather conditions and consequent changes in demand – when it is cold, customers use gas heating; when it’s hot, they use air conditioning, which uses electricity generated by gas-fired power plants. The weather has a greater impact on spot prices than on futures prices.
EU plans to reduce demand for natural gas and reduce reliance on Russia
Faced with the drop in Russian gas exports to the EU, the EU Council reacted by planning to reduce consumption in order to preserve supplies for the winter.
Daniel Hynes, senior commodities strategist at ANZ Commodities, said on August 14:
“With only two months to go before the start of the winter heating season, European authorities are concerned that they will not get through the winter if Russian gas remains at current levels. Germany offers additional energy saving initiatives such as reducing the minimum temperature in offices.
On July 26, the EU announced that its member states would reduce its natural gas consumption by 15% this winter as part of the trading bloc’s energy security measures.
The Council regulation warns that it “provides for the possibility of triggering a ‘Union alert’ on security of supply, in which case the reduction of gas demand would become mandatory”.
According to the EU, member states have the discretion to implement measures of their choice to achieve the planned consumption reduction between August 1, 2022 and March 31, 2023.
However, Member States can request a derogation from the demand reduction obligations if they have limited gas flow interconnections to other Member States.
Before July, the EU had already planned to phase out Russian imports of petroleum and petroleum products by 2023.
On June 3, the EU announced that it would impose new sanctions on Russia by implementing a total import ban on all Russian crude oil and marine petroleum products, subject to a transitional period of six to eight months. .
This latest import ban is expected to affect 90% of current oil imports from Russia. According to the EU, the trading bloc imported 48 billion euros ($48.94 billion) worth of crude oil and 23 billion euros worth of refined petroleum products from Russia in 2021.
A tight supply to support the natural gas market
Due to the supply shortage, analysts at Dutch bank ABN AMRO expected natural gas prices to remain high through 2025-26, said Hans van Cleef, senior energy economist at ABN AMRO, July 18:
“Europe will remain heavily dependent on gas imports, as local investment in gas exploration will remain very limited and the transition to renewable alternatives will take years to materialize and decades to completely eliminate natural gas from the energy mix.
“Therefore, stocking up on inventory is an important step in preparing for tight market conditions in the colder months of this year and next, but it does not provide
no guarantee whatsoever that there would be sufficient supply available to meet demand.
When reviewing natural gas futures analysis and forecasts, it is important to keep in mind that analysts can be wrong. Forecasts should not replace your own research. Always do your own due diligence before investing. And never invest or trade money you can’t afford to lose.
What is the prediction for natural gas?
Many analysts expect natural gas prices to remain high in the short to medium term due to the supply constraint related to Russian sanctions. However, analyst forecasts may be wrong, always do your own research before making any investment decisions. And never invest money you can’t afford to lose.
Is natural gas a good investment?
Whether or not natural gas is a good investment for you will depend on your investment objective, the composition of your portfolio and your risk profile.
Should natural gas prices increase?
No one can say for sure, but some analysts like ABN AMRO expect gas prices to remain high through 2025 to 2026. However, analysts’ forecasts may be wrong. Always do your own research before making any investment decision. And remember never to invest or trade more money than you can afford to lose.