Natural Gas Prices Surge to One-Year High Amid Supply Declines and Cold Weather

Natural gas futures have witnessed a significant rally, climbing 18% this week, fueled by forecasts of colder weather across the United States and fears of disruptions to European liquefied natural gas supplies. This surge has resulted in the highest prices seen in nearly a year, as traders respond to the shifting climate and market conditions.

Cold Temperatures Drive Demand

According to Beth Sewell, president and chief executive officer at Quantum Gas & Power Services, “After an unseasonably warm fall, we’re finally seeing some winter temperatures in most of the country, which has excited traders who thrive on volatility.” She noted that the forecasts predict significantly colder temperatures leading into early December, which will trigger an increase in heating demand.

On the New York Mercantile Exchange, natural gas for December delivery (NG00) (NGZ24) settled at $3.34 per million British thermal units, marking an increase of 15 cents, or 3.3%. This is the highest settlement for prices since November 15, 2023, according to Dow Jones Market Data, with prices now trading 18.2% higher week-to-date.

Impact on U.S. Consumers

The rise in natural gas prices is undoubtedly bad news for U.S. consumers. As many utilities tend to pass on input price increases to customers, David Allen, managing director at Octane Investments, explained that “higher prices will result in higher electricity costs.” However, he pointed out a potential “silver lining” related to the upcoming U.S. election. While it is unlikely that the Inflation Reduction Act will be repealed, the push for accelerated fossil fuel-plant closures and significant expansions in intermittent energy may weaken, potentially leading to lower electricity prices for consumers.

Supply Data Fuels Price Rally

This week marked the “first draw of the winter season” in U.S. natural gas supplies, as reported by the Energy Information Administration. This contributed to the ongoing price surge, explained Matthew Polyak, managing partner at Hummingbird Capital. Following the agency’s report that U.S. supplies declined by 3 billion cubic feet for the week ending November 15—against an expected increase of 5 bcf—prices peaked at $3.451.

Despite the drop in supplies, analyst Seth Harper from Schneider Electric notes that the reduction was less than the five-year average, which typically sees a decline of 16 bcf. He mentioned that the storage surplus compared to the five-year average now sits at 6.4%, which ordinarily would indicate a bearish sentiment towards prices. However, the current rally demonstrates that natural gas prices are unlikely to wane soon, according to Harper.

European Market Dynamics

On the international front, the ongoing escalation of the Russia-Ukraine conflict has resulted in higher European natural gas prices. Andrew Meleney, an analyst at Infrastructure Capital Advisors, noted that European prices hit their highest level in a year as fears surrounding potential disruptions to gas flows have intensified. The most-active Dutch TTF natural-gas contract for December (TTFC00) concluded Thursday at 48.70 euros, appreciating by 4.1% during the session.

Allen from Octane Investments pointed out that Europe previously experienced two relatively warm winters following the onset of the Russian invasion of Ukraine, but this year differs significantly. Should LNG sellers redirect shipments intended for other destinations to Europe, it could increase demand for U.S. LNG, according to Sewell. Nevertheless, she stated that current U.S. LNG exports remain “fairly robust and stable.”

Future Prospects for U.S. LNG Exports

The backdrop of heightened LNG permitting, along with the opening of the Plaquemines LNG plant in Louisiana and the Corpus Christi LNG Stage 3 facility in Texas, is also playing a crucial role in supporting U.S. LNG pricing, according to Polyak.

As the U.S. LNG market evolves toward a more international orientation—shipping a larger volume of LNG—this might exert pressure on domestic LNG prices. Polyak noted, “Global datacenter demand growth could continue to still feed the beast, especially if there is an industrial demand recovery behind it.” This highlights the dynamic interplay between domestic and international markets for natural gas as prices reshape their trajectory in the coming weeks.

Conclusion

With the promising winter temperatures finally setting in and geopolitical tensions aggravating European gas inventories, the surge in natural gas prices might be a harbinger of more volatility ahead. For consumers, this tightening in supply could mean higher costs for heating and electricity, while the interplay between U.S. and European markets introduces complexity into an already intricate landscape.