Natural-gas prices are on track to score their largest yearly gain in more than two decades, raising the likelihood of high winter-heating bills.
Volatile action so far this month has seen prices for the fossil fuel climb to the highest level in almost 13 years, then drop back to their lowest in weeks.
The price surge has been driven by “tight global supply and strong demand amid escalating energy needs,” while “fluctuating weather expectations and output forecasts have been the primary catalyst in the recent drops,” says Christopher Zook, chairman and chief investment officer at Houston-based CAZ Investments.
Natural-gas futures are trading about 120% higher year to date on the New York Mercantile Exchange, with prices
Prices eased back to $5.345 on Oct. 11, their lowest in just over two weeks. They’re still on track to mark the highest yearly gain since the 2000, when prices more than tripled. Similarly, the United States Natural Gas Fund
an exchange-traded fund that tracks futures contracts, has more than doubled this year.
Natural gas is “expensive on a relative basis” and global demand could “shift toward oil to facilitate power generation, leading to a pullback in natural gas,” says Zook. For now, U.S. natural-gas supplies remain as buyers who face higher costs in Europe and Asia continue to purchase as much as possible from the U.S., he says.
For the week ended Oct. 8, natural gas in storage—supplies available to the market—stood at 3.369 trillion cubic feet, down about 13% from this time a year ago and nearly 5% below the five-year average, according to the Energy Information Administration, which defines the winter season as October through March.
Gabe Daoud, senior analyst at Cowen, blames the drop in storage below the five-year average on a lack of U.S. production hikes. “Investors continue to prefer companies return capital to shareholders [rather than] increase drilling,” he says.
On the demand side, periods of high heat contributed to strong cooling demand, boosting natural-gas demand from power plants, and liquefied natural gas facilities have been running at full capacity alongside increased exports to Mexico, says Daoud.
That’s leading to worries about winter-heating costs. The EIA expects U.S. households that primarily use natural gas for heating to spend an average of $746 — or 30% more than last winter — to heat their homes.
The EIA also lifted the monthly forecast for 2021 spot natural-gas prices at Henry Hub, the distribution hub in Louisiana, by nearly 15% to $4.17 per million BTUs.
An energy shortage similar to the one in Europe and Asia isn’t likely to happen in the U.S. because the nation has “significant storage and is one of the largest natural-gas producers in the world,” says David Grumhaus, president and CIO at Duff & Phelps Investment Management.
“The U.S. has “much more diverse electricity generation, with significant amounts of coal and nuclear plants….Mechanisms are in place to correct [energy price spikes] fairly quickly.””
— David Grumhaus, Duff & Phelps Investment Management
The U.S. has “much more diverse electricity generation, with significant amounts of coal and nuclear plants,” he says. Mechanisms are in place to correct energy price spikes “fairly quickly.”
U.S. natural-gas prices may be “range-bound until December, when the market gets a first real look at winter,” then fall significantly in the spring as the market switches from using storage to filling storage, says Grumhaus.