- Natural gas and electricity prices are at record highs in Europe and Asia, while US prices have more than doubled this year.
- Several factors have contributed to energy shortages, including a surge in demand while supply remains constrained.
- “The US is much more insulated from this global energy trend than the rest of the world,” said Francisco Blanche, Head of Global Commodities, Equity Derivatives and Cross-Asset Quantitative Investment Strategy at Bank of America Merrill Lynch.
The global energy crisis has pushed natural gas prices to record highs in the UK, Europe and Asia. However, experts say the stratospheric prices seen in Europe are unlikely to be carried to the states.
Much will depend on what the winter season brings. But the US is in a better position in the colder months, given that it is the world’s largest natural gas producer, and because inventory levels are not as low as they are in Europe.
“We are at a unique point in time where all energy prices are rising,” Francisco Blanche, head of global commodities, equity derivatives and cross-asset quantitative investment strategy at Bank of America Merrill Lynch, said on CNBC last week. “Exchange.” “The US is much more insulated from this global energy trend than the rest of the world,” he said.
This does not mean that US prices will not be volatile. Natural gas futures on Tuesday closed at their highest level since December 2008. On Wednesday, the contract traded as high as $6.466 per million British thermal units (MMBtu).
Natural gas for November delivery fell below that level, but it is still on a profit path for the seventh week in a row. The contract is currently trading at around $5.63 per mmBtu, which is more than double the price at the beginning of the year.
But the moves abroad are far more extreme. Deutsche Bank analysts said prices in Europe are up five times, while prices in the Americas and Asia are up nearly 1.5 times. In Europe, the equivalent of increasing the price of natural gas if oil was trading around $200 a barrel.
“The importance of these moves on inflation, growth and external accounts should not be underestimated,” the firm wrote in a note to clients. “These price moves are a big deal.”
Coal and oil prices are also rising. West Texas Intermediate crude futures, the US oil benchmark, rose above $80 a barrel on Friday for the first time since November 2014. International benchmark Brent crude, meanwhile, was trading at its highest level since 2018. Analysts say a rise in natural gas prices could also signal that. Utilities to swap fuel for oil.
Several factors are driving the rise in prices of natural gas and commodities such as oil and coal in general.
Demand is picking up again as economies get back to business and consumers return to pre-pandemic activities. Also, manufacturers, who were facing an unprecedented slowdown in 2020, have been slow to ramp up production.
A colder and longer-than-expected winter 2020 meant that European inventory levels were falling below average. On top of that, slow wind speeds and dry conditions weighed on renewable energy production. Carbon offsets are expensive and the continent has moved away from coal-fired plants, meaning everyone was suddenly competing for natural gas.
Europe’s gas production has declined over the past two decades, and the continent is now dependent on imports from Russia. The country has limited supplies to Europe this year in what some have called a politically motivated move, although this week President Vladimir Putin said Russia could boost production in an effort to ease tensions in Europe.
Europe is not the only place in need of supplies. Asian demand is rising as countries, including China, seek to move away from dependence on coal. In some cases, cargoes are headed for Asia bypassing Europe, where they may fetch a better price.
The Oxford Institute for Energy Studies summarizes this confluence of factors, noting that it makes “this perfect storm”.
While the US has its own electricity problems, as demonstrated in Texas last winter, when millions of customers were left in the dark for several days, Europe and Asia are unlikely to have the same price surge and energy shortage.
“[The U.S.] “The rest of the world doesn’t have to depend on the rest of the world to provide its supply, and that’s exactly what has been Europe’s problem,” said Robert Thumel, managing director of TortoiseEcofin. He said the shortfall was not from a lack of supply but from a lack of infrastructure – especially for liquefied natural gas.
“You’re not going to look to the US to defend here, because there isn’t enough infrastructure on either side – on the US or European side and most importantly, on the Asian side to solve this,” he said.
At the end of the day, Thummel said that his forecast for natural gas prices comes down to all-weather. In a normal winter, prices may move slightly in the $3 to $4 range, while warmer-than-expected temperatures may retreat between $2.50 and $3. On the other hand, if there is a fall in the temperature, the prices may go up in double digits.
While the US is in a better position in winter than Europe, such wild swings in foreign energy markets have wide-ranging effects around the world. Credit Suisse this week raised its forecast for fourth-quarter prices by more than 60% — from $3.50 MMBtu to $5.75 MMBtu.
“The near-term set-up and increasingly tight global demand fundamentals around winter storage inventories have proven to be faster than we expected,” the firm wrote in a note to clients. While the new target has been raised relative to average prices in recent years, it is still well below the $6 level natural gas crossed last week.
Meanwhile, JPMorgan raised its 2022 annual average price forecast from $1.70 MMBtu to $4.81 MMBtu, titled “Unimaginable upside, limited downside.” The firm made sure to point out that it is unusual to adjust forecasts just before winter weather reports are available. But this time it was necessary. Analysts said there was an “absolute need” to adjust forecasts given the “risks that could upset this balance at the present time”.
“We go where the US supply and demand balance takes us, and that has taken us to a place we haven’t visited in a long time,” the firm said. For the current quarter, JPMorgan envisions an average price of $5.50 MMBtu, which will bring the 2021 average price to $3.65 MMBtu.
While a lack of energy is potentially the primary driver of price action, some volatility could also result from a massive rally by Wall Street firms forcing futures to short and cover positions later.