Natural Gas Prices and the Next Picture
On September 27, natural gas prices rose to a new seven-year high in the United States, as the expiration of the October options added momentum to a rebound fueled by growing concerns from analysts about the expected shortage of supplies for this coming winter.
In recent weeks we have observed how globally there have been conditions that could trigger natural gas prices for consumers, and what is disconcerting is the impact that this could have on electricity tariffs.
In this report we will share what we look for in the market prior to the start of the winter season, which is literally around the corner.
In Europe, the cost of natural gas in the wholesale market has soared to all-time highs particularly in the UK, Spain, Germany, France and Italy. Bills for residential, commercial and industrial users have already skyrocketed, and could rise further as the cold approaches and more fuel is needed for electricity generation and for bringing heating systems online, which is when demand for gas skyrockets.
The increase in prices in Europe was due to an unusual spring in which temperatures were lower than average, particularly in the months of April and May, which caused a shortage of natural gas storage in a period that traditionally begins when demand decreases. This caused a storage reduction of 20% below the usual average.
In addition, wind resources were not at the levels traditionally recorded in the North Sea and many countries began to abandon the use of coal as a measure to deal with the climate crisis.
If we add to this some countries like Germany, who are looking to stop relying on nuclear energy in 2022, we get a glimpse of a perfect storm formulating, at least in reference to the prices of natural gas on that continent.
On this side of the Atlantic, unfortunately the situation is not much different, the price of natural gas has been hovering around just over $5 per million BTU for the past few weeks, in fact, gas for delivery in October rose as much as 8 percent, to $5,552 per million BTU, the highest level recorded since February 2014. Traders were closing bearish positions before the expiration of October options and futures during last week of September.
The prices of $4 dollars per million BTU are some we may not see for a while. Everything depends on the coming months not bringing sever cold temperatures, that we experience normal consumption levels, that storage of this commodity does not present any major surprises and that the pipeline system does suffer any unforeseen events.
The demand for natural gas has been increasing, as countries have been returning to their industrial activities, but not natural gas producers. Natural gas production in the U.S. has not reached levels that were recorded before the COVID-19 era began.
In the United States, storm-related supply disruptions have compounded concerns about slow production growth, as drillers heed investors’ calls for financial restraint, making it unlikely that shale producers will be able to bail out the rest of the world this winter.
In our neighboring country to the north, there was an unusual increase in the demand for natural gas this summer, as in Europe, affecting the storage inventories of this fuel. To give you an idea of the size of the impact last year, we had on these same dates around 3,600 million cubic feet of storage registered, right now this amount is around 3,000 million. This differential is equivalent to approximately 6 days of consumption, this could affect the supply/demand balance in the following months.
The approach for the pending winter makes analysts nervous, because of their concern regarding the input and, therefore, its demand. Because of their concerns, the prices of natural gas futures have been increasing. For example, at the Henry Hub, one of the most important references points when it comes to the price of natural gas in our country, is around 4.8 dollars per million BTU. If we compare this data with the one registered in January of this year, in which it was quoted between 2.8-2.9 dollars per million BTU, it confirms that the price increased almost 70% in these last eight-nine months.
Another fact we must take into account is: The raw materials for the gas delivered in March compared to that of the April contracts, is essentially a bet on the shortage of this fuel for the end of winter, which unfortunately has shot up to the highest levels since 2005 for this same period.
The reduction in oil production also affects the availability of natural gas, and therefore its price, because a good fraction of the processed gas comes from oil wells that extract it as an associated gas. The production cuts continues and therefore, will not be enough to meet demand.
About 24 percent of gas production in the Gulf of Mexico remains closed after Hurricane Ida, according to data released on Thursday, Sept. 23, by the Office of Safety and Environmental Compliance in Mexico. Operations in the region are not expected to fully recover until 2022.
If we add to the above President Biden’s return to the Paris Agreement and their new goal of reducing carbon dioxide emissions by 52% over the next 8 or 9 nine years has forced oil companies to rethink their plans, affecting their production levels to those of 2018, which caused the levels of inventories of gas reserves in the United States to register values that are 6.9 percent below the average of the last five years.
Again, if we experience a shortage of natural gas available to be turbines in CFE’s combined cycle plants, then we would be facing an even more discouraging scenario, since the old fuel oil base generation plants would have to be used.
Taking into account that the electricity generation sector is the largest customer of natural gas which demands just over 50% of the gas that is marketed in the country, we can assume that the price of electricity tariffs will be impacted upwards. It’s for that same reason, the Secretary of Internal Revenue service for Mexico (SHCP) will have to allocate a greater number of resources to subsidize the energy generated by the Federal Electricity Commission and delivered to the market rates that do not reflect price changes. The key question is: Are you ready to face this?