Europe’s Unquenchable Natural Gas Thirst Is Sending Prices Soaring

The Henry Hub gas benchmark hit the highest in 14 years on Friday. If this was oil, everyone would be yelling about it. But gas has yet to garner the sort of attention oil receives on a regular basis. Maybe it will soon.

Natural gas prices in the United States are breaking record after record without losing momentum as factors serving to push them higher remain active and multiply. The surge in liquefied natural gas exports to Europe is one big reason, and rising demand as the weather becomes hotter is another. Meanwhile, drought has joined the list of factors at play.

The drought that began earlier this year is still gripping the Southwest, compromising hydropower generation and expanding, indicating that even less hydropower will be available as summer advances and with it, demand for air conditioning. 

Swathes of the Southwest and the West Coast and the Pacific Northwest were in a state of drought ranging from severe to exceptional as of May 24, according to the U.S. Drought Monitor, and while some parts of this region have gotten some precipitation, the situation remains challenging.

Natural gas inventories, meanwhile, are falling. In its latest weekly natural gas report, the Energy Information Administration reported that working gas inventories stood at 1.812 trillion cu ft in the week ending May 25, adding 80 billion cu m during the reporting period. Inventories are now 18 percent lower than they were a year ago and 15 percent lower than the five-year average for this time of the year. The agency noted in its report that demand in the Southwest and Texas was growing faster than supply could catch up, contributing to higher prices. And it was no longer about the drought.

That, the EIA said, began to let up in the week to May 25, but demand from LNG processors remained exceptionally high. According to the report, gas feed deliveries to liquefaction trains along the Gulf Coast rose by 900 million cu ft daily to 11.7 billion cu ft in the week to May 25.

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No wonder, then, that the Henry Hub benchmark broke the $9 barrier last week and is heading higher, possibly into two-digit territory, as summer begins for real.

“It’s like if oil went to $200 (per barrel), but it’s not getting the same kind of attention,” Dulles Wang, an analyst with Wood Mackenzie, told the Canadian Press. “And I think there’s probably still more upside potential for natural gas prices.”

Wang is not alone in this expectation. The EIA, too, recently said that it expected considerably higher gas prices, especially if the summer turned out to be hotter than initially forecast.

There is also the steadily strong demand from Europe as it seeks to refill its storage caverns ahead of next winter season and, at the same time, diversify away from Russian gas.

The gas crunch, in other words, is coming to the United States, as natural resource investors Goehring & Rozencwajg recently forecast.

“Asian and European natural gas prices stand at $35 per mmbtu, versus $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 about to surge and converge with international prices within the next six months,” they wrote earlier this month.

With record exports, droughts ahead of normal drought season, and, perhaps more importantly, the lack of any sizeable increase in production, the forecast may well prove to be quite accurate, perhaps even earlier than the next six months. This would add to already significant inflationary pressures as electricity becomes more expensive and may prompt action from the federal government.

By Irina Slav for Oilprice.com

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