Analysis and News

Surging Natural Gas Prices

BY ARMCORE VPI's COO: Kezia Bridgewater

Natural gas is made up of a mixture of four gases, primarily methane which accounts for 70-90% along with ethane, butane and propane. It is a clean source of energy. Besides electricity and heating demand, natural gas is an important feedstock and is used in the processing of chemicals, fertilisers, paper and glass, among other products.

Lower supply and rising demand created the perfect circumstances for higher prices. Demand increased as rising temperatures led people across the US and more specifically the Northwest to acquire air conditioning for their homes. Now as winter is approaching there is expected higher demand for fuel as the need for heating and power generation becomes more severe.

The higher summer demand resulted in significantly lower gas injection into storage for the winter season. Total inventories were 16 percent below last year’s level and 6.9 percent below the five-year average. A weekly natural gas report by the U.S. Energy Information Administration (EIA), revealed inventories in underground storage facilities rose by only 76 billion cubic feet, or barely 2.5 percent, during the week ended September 17th.

Hurricane Ida and its devastating effects have contributed to lower supplies. The Gulf of Mexico accounts for almost 51 percent of the total natural gas processing capacity in the US, however, Ida forced production companies to evacuate the region. On September 23rd, the US Bureau of Safety and Environmental Enforcement (BSEE) estimated that approximately 24.3 percent of the gas production in the region was still not back up in operation.

Adding to the concerns that demand might not meet supply is the rise in exports by US producers. Production has also decreased in response to pressure from investors to reduce debt and boost share buybacks.  According to the EIA in a recent report, domestic gas supplies have grown at a slower than expected pace in recent weeks.

Prices are skyrocketing globally due to the fear of a shortage. Since the US is an exporter, the domestic price is influenced by pressures in the global market. It has also lifted the shares of companies that specialise in natural gas production, like EQT, Range Resources, Cabot Oil and Gas and Antero Resources.

Brent, the international benchmark of crude oil, has now surpassed $80 per barrel. European benchmark, The Dutch Title Transfer Facility, future gas prices, for delivery in October climbed 10 percent. Falling temperatures in the UK and in parts of the rest of Europe, as well as falling supply from Russia via the Yamal-Europe natural gas pipeline, pushed gas prices even higher.

Natural gas prices are expected to keep rising and even more so if there is a colder than usual winter. Goldman Sachs analysts have acknowledged the possibility that these prices might even double given the aforementioned.

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