US natural gas prices hit a 14-year high this week, with the Henry Hub benchmark temporarily above $10 per million British thermal units. And demand isn’t going to drop any time soon.
The United States has become the biggest supplier of natural gas to struggling Europe as the latter first slipped into a gas crisis after demand outstripped supply last year. Then he imposed seven sanctions packages against Russia, his main supplier, for his invasion of Ukraine.
US gas, liquefied and transported to LNG import terminals in Europe, has been instrumental in filling Europe’s gas storage caverns ahead of schedule. At the same time, he highlighted the vulnerability of Europe in the field of gas supply: it has practically no alternative to American gas, which has caused its gas bill to increase tenfold. more expensive than what European countries normally spend on gas.
The vulnerability was also highlighted by the shutdown of production at Freeport LNG, which supplies around a fifth of US LNG and has now said it will not restart production until November as prices continue to rise. .
“Virtually all of our fundamental and technical indicators continue to flash green toward higher price levels,” Ritterbusch & Associates said in a note cited by The Wall Street Journal earlier this week.
The trading company also said US natural gas prices could also climb further, close to $12 per million British thermal units in the not too distant future.
Meanwhile, Reuters reported this week that LNG prices in Europe have reached a record discount to the European benchmark: the TTF hub in the Netherlands where the gas is delivered. A discount normally sounds like good news, but this time the discount was the result of a sharp rise in TTF prices after Gazprom announced it would shut down Nord Stream 1 for unscheduled maintenance on its only remaining compressor.
Yet, due to surging US natural gas exports to Europe, US gas prices have also become much more vulnerable to various events. This week alone, news of the delayed restart of Freeport LNG sent U.S. gas prices down 5%. The longer-term outlook, however, remains optimistic.
Earlier this year, investment firm Goehring & Rozencwajg forecast that US natural gas prices were poised to take off after European prices before too long. The reasons for this surge were global gas supplies and the new central role of US producers as major suppliers to Europe.
Additionally, Goehring & Rozencwajg predicted that gas production in the United States was approaching a plateau.
“Natural gas prices in Asia and Europe are $35 per mmbtu, compared to $8.20 per mmbtu here in the United States. Given the underlying fundamentals that have now developed in US gas markets, we believe prices are poised to rise and converge with international prices over the next six months,” Goehring & Rozencwajg said. in May.
This week, Asian LNG prices started the week at around $60 per mmBtu, while European October LNG cargo prices were trading at just over $60 per mmBtu.
This is a nearly double increase from May, and prices are unlikely to come back down as the race to get enough gas for the heating season heats up.
This means that domestic gas prices in the United States will also remain under upward pressure, and that will also last for some time.
Reuters reported this week that U.S. liquefied natural gas producers have signed contracts for the delivery of some 48 million tonnes of LNG in total, which would lead to an increase in total LNG exports of up to 60% if all new terminals planned were built. .
Meanwhile, because there aren’t enough LNG export terminals to meet current demand, gas inventories in the United States are dwindling, and Goehring & Rozecwajg might be right, despite an increase in gas production.
“We’re starting to see a backlog in storage builds that could lead to a precarious draw season in the event of a harsher than expected winter,” Neal Dingmann, energy equity analyst at Truist Securities, told The Wall. StreetJournal. .
“There is potential for a winter superspike in the United States.”
A spike in gasoline prices in the United States will be very bad news, and not just for the United States itself. Europe is literally dependent on American liquefied gas as it seeks to sever all trade ties with Russia.
But if gas prices rise too high in the United States, export restrictions could be in order, as gas is still widely used in the United States for power generation, and no one wants voters with exorbitant electricity bills ahead of the November midterms. And that means Europe will be left in the ditch with not enough gas to get through the winter. For pricing, the sky will be the limit.

By: Irina Slav

Irina Slav for Oilprice.com