Natural-gas futures climbed to their highest level in 14 years, with tight supplies in the U.S. and Russia’s move to reduce the flow of fuel to Europe pulling prices up for a second straight week.
September natural gas settled at $9.336 per million British thermal units on Friday, the highest front-month contract finish on the New York Mercantile Exchange since August 2008, according to Dow Jones Market Data. Prices ended the week 6.5% higher.
The main reason for the natural-gas rally this week is the “sharply reduced flows from Russia amid a backdrop of only average stockpiles,” Tyler Richey, co-editor at Sevens Report Research, told MarketWatch.
“Even with inventories sitting near their five-year average right now, the fact that flows from Russia through Nord Stream 1 are trickling at just 20% of capacity means that even modest demand at the start of the winter will quickly begin to draw supply down,” he said. “Below-average temperatures could very well see supply quickly depleted.”
Russia’s state-owned energy producer Gazprom said in late July that natural-gas exports through the vital pipeline to Germany would drop to 20% from 40% of capacity. It attributed the decline to sanctions-related issues with turbines that had already reduced flows, according to a July 25 article in The Wall Street Journal.
On Friday, Gazprom said it would shut the Nord Stream pipeline for three days later this month to perform maintenance, according to the The Wall Street Journal.
The September European benchmark Dutch TTF gas futures contract, meanwhile, climbed by about 35% since the last trading day of July to stand at 257.40 euros per megawatt-hour on Friday. It traded at just 63.317 euros at the end of 2021.
Bottom line, “without Russian natural gas, Europe is going to have a very hard time satisfying even subdued demand this year,” said Richey. Without a resolution in Ukraine, “prices in Europe are likely to continue to new record highs in the months ahead, which will subsequently buoy U.S. market prices as well.”
Data from the Energy Information Administration released Thursday showed an increase of 18 billion cubic feet in U.S. natural-gas supplies in storage for the week ended Aug. 12.
That increase was smaller than the 34 billion cubic foot average climb expected by analysts for the week, and below the five-year average rise of 47 billion cubic feet, according to S&P Global Commodity Insights.
Supply growth has been a “real struggle,” Peter McNally, global sector lead at Third Bridge, told MarketWatch. “Producers have been hesitant to invest aggressively and even when they have, the supply chain of oilfield services and labor has proven to be a bottleneck.”
Experts at Third Bridge “do not see a meaningful move on the supply side until 2023,” he said. ” In the meantime, the adjective used for supply is ‘sluggish’.”
On the demand side, “weather has played a factor in the last few weeks as temperatures soar and power generation has struggled to keep up,” said McNally, adding that Third Bridge has forecast “double-digit” average prices for natural gas this winter.
“In an extreme scenario of weather in specific parts of the country, prices could spike as high as $30” per million Btus, but that’s not likely a price that would be sustained for more than a week or two, he said.
Meanwhile, hurricane season in the Atlantic continues through Nov. 30 — and along with it the potential for production disruptions in the Gulf of Mexico.
Hurricanes are less of a factor for natural gas given that the region’s share of production continues to decline, said McNally.
Still, if hurricanes force the closure of U.S. liquefied natural-gas export terminals without a disruption to the natural-gas pipelines feeding those facilities, prices in the U.S. would fall, he said. “LNG has become a critical source of U.S. demand,” as shown by the price drop in July when the Freeport LNG facility was shut due to a fire.
“Seasonality could trigger a drop in prices,” McNally said. “Summer is almost over and the ‘shoulder months’ for demand are ahead,” with not as much heating or cooling demand as we head into autumn.