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Natural gas prices surge as demand rises in anticipation of northern winter

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By Danica Cullinane - 

Natural gas prices are soaring as the northern hemisphere begins to prepare for a very cold winter, all the while focused on a post-COVID-19 recovery, and as economies steer away from coal and aim to use cleaner energy sources.

Prices have been steadily rising since May but skyrocketed in the last week to US$5.84 per thousand cubic feet (A$8.06/Mcf) on Wednesday, the highest it has been since 2014.

Natural gas prices september 2021

Natural gas prices have surged in recent months.

Many factors have contributed to the surging price, including Europe’s wholesale gas prices rising by 250% since the start of the year and global energy demand growing significantly as China and other major economies rebound from the pandemic.

In addition, calmer weather has reduced output from Europe’s wind turbines (which normally accounts for about 20% of UK power alone) and the continent’s aging nuclear plants are being phased out, making gas even more critical as governments warn of blackouts and factories closing.

According to reports, inventories at European storage facilities are at historically low levels for the first time this year (about 20% below the seasonal average) and pipeline flows from Russia and Norway have been limited.

US senior adviser for energy security Amos Hochstein told reporters there may not actually be enough gas for heating in parts of Europe “if the winter is actually cold”.

“It won’t be a recessionary value [for some countries], it will affect the ability to actually provide gas for heating. It touches everybody’s lives,” he said.

There are also concerns that economies that simply can’t afford the higher liquefied natural gas (LNG) prices, including Pakistan and Bangladesh, may have to go without the fuel they rely on.

The issue has sparked controversy in Pakistan with news outlets reporting oppositional politicians demanding an inquiry into purchases by the state-owned importer.

In Asia, LNG importers are paying higher prices than typical of this time of year in order to secure supplies, but desperation to ensure there is sufficient energy resources means coal and oil are seeming like viable options despite governments’ efforts to hit emissions targets.

Spot LNG cargoes in Asia are trading above US$20 per British thermal unit, a significant rebound from the low of US$2/MMBtu experienced during the 2020 market crash and the highest level for this time of year in over 10 years.

Rising gas prices parallel oil’s higher price

The rising gas prices coincide with higher oil prices as oil markets tighten and demand recovers amid supply disruptions caused by hurricanes in the Gulf of Mexico. As a result, US investment bank Goldman Sachs has raised its forecast year end price for oil to US$90 per barrel.

Although as Forbes petroleum economics analyst Michael Lynch argues, gas and oil’s correlation in price movements are “usually more coincidental than not” as their association stems from importers’ decisions in the 1970s to link internationally traded natural gas with oil prices based on their heat content.

“The logic for that is not much greater than linking coffee and tea prices based on their caffeine equivalence,” he said.

However, Goldman also predicted a bump in oil prices due to a colder-than-usual winter in Europe and Asia – a factor that certainly influences gas prices with utilities and physical traders already beginning to stockpile the commodity at “historically elevated rates”.