Natural gas prices have been on a bullish run since the start of the year, reaching their highest levels since 2014. The US natural gas futures contract for June delivery settled at $2.278 per MMBtu on May 13, up 4.02% from the previous day and 5.62% from a week ago. What are the factors driving this rally and what are the implications for consumers and producers?
Supply Constraints and Rising Demand
One of the main reasons for the surge in natural gas prices is the tightness in supply, both domestically and globally. The US natural gas production has been declining since November 2020, mainly due to lower drilling activity and reduced capital spending by energy companies amid the Covid-19 pandemic. According to the US Energy Information Administration (EIA), the dry natural gas production averaged 92.1 billion cubic feet per day (Bcf/d) in April 2021, down 2.3 Bcf/d from March and 5.8 Bcf/d from April 2020.
On the other hand, the demand for natural gas has been recovering as the economy reopens and the weather warms up. The EIA estimates that the total natural gas consumption averaged 79.9 Bcf/d in April 2021, up 2.4 Bcf/d from March and 11.6 Bcf/d from April 2020, when the lockdowns were in full effect. The demand growth was driven by the residential and commercial sectors, which increased by 6.7 Bcf/d and 3.6 Bcf/d respectively from March, as well as the power sector, which increased by 1.4 Bcf/d.
The supply-demand imbalance has resulted in a drawdown of natural gas inventories, which are currently below the five-year average for this time of the year. The EIA reported that the natural gas storage levels stood at 2,029 Bcf as of May 7, 2021, which is 345 Bcf lower than the same week last year and 61 Bcf lower than the five-year average.
The situation is similar in other parts of the world, where natural gas prices have also soared due to limited supply and robust demand. In Europe, the natural gas prices at the Dutch TTF hub reached a record high of $10.63 per MMBtu on May 12, while in Asia, the spot LNG prices rose to $9.10 per MMBtu on May 13, according to S&P Global Platts. The global supply crunch has been exacerbated by several factors, such as maintenance outages at LNG export facilities, pipeline disruptions, low storage levels, and geopolitical tensions.
Outlook and Implications
The outlook for natural gas prices remains bullish in the near term, as the supply constraints are expected to persist and the demand is likely to remain strong during the summer cooling season. The EIA forecasts that the US natural gas spot price will average $3.05 per MMBtu in 2021 and $3.27 per MMBtu in 2022, up from $2.03 per MMBtu in 2020.
The higher natural gas prices have positive implications for the natural gas producers, who can benefit from improved cash flows and profitability. However, they also pose challenges for the consumers, who may face higher energy bills and inflationary pressures. Moreover, they may also affect the competitiveness of natural gas as a fuel source for power generation, especially compared to renewable energy sources that have become cheaper and more abundant.
The long-term outlook for natural gas prices depends on several factors, such as the pace of economic recovery, the level of investment in natural gas infrastructure and exploration, the development of alternative energy sources, and the environmental regulations and policies that may affect the demand for fossil fuels.
