Natural gas prices are on the climb and this climb is about to intensify in the first months of the new year as seasonal demand hits its peak in the northern hemisphere. That’s bad news for struggling economies.
Gas prices in Europe, Asia, and North America have made solid gains this year. Reuters’ Gavin Maguire reported this week those fall in the range between 30% and 50%–and that’s not the end of the rally. Winter is just beginning, and the weather in Europe and Asia, as well as most of North America, is about to get a lot colder.
Energy market analyst John Kemp reported that speculators in the United States were covering their short bets on natural gas at the fastest rate in over a year, reinforcing expectations of stronger gas prices. What’s more, these bets are being made just when the Energy Information Administration reported that the U.S. is entering winter with abundant natural gas reserves: the highest level since 2016, in fact. Yet even this fact, with gas in storage at over 3.9 trillion cu ft, has not been enough to maintain speculators’ bearish mood.
In addition to the seasonal rebound and demand—and the expectation that it will be one major rebound after two warm winters—one driver behind this change in sentiment is the outlook for production. The focus here is on the United States and the fact that gas producers have been curbing production because of the chronically depressed prices. Now that prices are improving, it will be a while before the industry responds with a production boost—and until then, prices will be trending higher. So will power generation costs for most of the key markets.
Europe will continue to be a major driver of natural gas demand in the coming months. Winter is not the top performance season for wind and solar, as recently evidenced by the energy mix of Germany, which featured coal as its biggest generator, followed by natural gas, and wind a close second to gas. Yet the gas that Europe is using to generate power is the same gas that much of Asia has come to rely on for its winter needs: U.S. liquefied natural gas.
This means we have another tight race for limited LNG supply this winter. China provided some easing of that tightness this week when it completed the final connection of Russia’s Power of Siberia gas pipeline to end consumers, which would allow the pipe to reach its full capacity next year, covering 9% of the country’s gas demand. That’s 38 billion cu m that China won’t be looking to buy on the LNG spot market, and this is good news for other Asian countries—if they can outbid the Europeans.
This will be tough, and the Europeans will most likely get more gas than Asian nations this winter, as they did back in 2022. This means two things: that Asian nations will fall back on coal once again and that Europeans’ electricity bills will rise once again, as will the price of everything that features electricity in its input costs.
It is a tricky time for yet more consumer price inflation in Europe as people’s disgruntlement with the cost of living intensifies, but there is no chance of avoiding that disgruntlement. Europe doesn’t have a lot of options when it comes to gas supply. And U.S. producers are yet to start ramping up output as prices reverse their decline.
This is perhaps the toughest stage in the energy commodity cycle for consumers. Supply is tightening because of a past surplus that drove prices down, prompting the production curbs. At the same time, as fate and the Earth’s rotation around the Sun would have it, demand is on the way to its annual peak, aggravating the imbalance with supply and set to cause some serious pain for consumers.
The data on gas withdrawals and injection into storage in Europe is enough to paint a picture that U.S. gas producers would enjoy, unlike European governments and other large buyers. In Germany, withdrawals on Tuesday stood at 942 GWh, while injections totaled 16.22 GWh. For France, the withdrawal figure was 930.7 GWh, while the injection figure stood at 96.50 GWh. Italy and the Netherlands also saw massive withdrawals compared to the injection of new gas into storage. The situation points to looming depletion unless winter temperatures let go smack in the middle of the season to give Europe a breather.
Yet the weather is notoriously unreliable when it comes to survival—and to energy security as the countries at the forefront of the energy transition are discovering for yet another winter. The looming gas shortage might give decision-makers in those countries pause for reconsideration of priorities, with energy security coming on top of emission levels. On the other hand, this has happened before, and it has not led to changes in priorities, so the chances of things changing now are slim.
Oilprice.com