By Michael DeCaluwe | September 27, 2021
Natural gas prices have been making headlines, both in the US and internationally.
- Forward gas prices in the UK have risen by 250 percent since January.
- In California, gas futures are four times higher than what they were in 2020.
- And the competition between Asia and Europe for LNG imports is getting fierce.
So what’s going on?
Factors Impacting the Natural Gas Market
Three factors — supply, exports, and demand — are causing the most movement in natural gas rates.
The amount of US natural gas currently in storage (in reserve and ready to use) is well below normal levels for this time of year. The low storage quantity is a result of a few things:
- the drought in the western US that has brought extreme temps and an increased need for energy,
- increased usage of gas to generate electricity, and
- a reduction in the amount of investment into gas exploration and production.
As a result, we are entering this winter with extremely “tight” supplies of gas. Any weather surprises this winter could cause gas rates to increase substantially.
The US exports natural gas to Mexico via pipelines and to Asia and Europe as LNG via cargo ship. And currently, exports to those regions are at record levels. While US energy consumers may think $5 per dekatherm is expensive, Asia and the UK are paying $20 and $26 per dekatherm, respectively.
At these price levels, expect US natural gas exports to stay elevated in the near future, further siphoning gas supply from our market.
With a booming economy, domestic demand for energy remains high. Add to that an overall increasingly volatile weather patterns, and you have a “perfect storm” (pun intended) for natural gas prices. As long as the economy keeps pace, you can expect demand to keep energy rates propped up.
Will these prices last?
Although short-term rates (one year out) are elevated, longer-term rates for the next two to four years have stayed relatively low. It remains to be seen if the factors described above have longevity to them.
Some things to consider:
- Will investor money into the energy sector remain on the sidelines?
- Will exports of natural gas continue to accelerate?
- Is the bullish economy a short-term phenomenon, or does it have legs?
What can you do to prepare yourself?
Many analysts are predicting that the era of low energy rates is behind us. However, there are a few ways you can prepare yourself for this new dawn in the natural gas market.
- Revisit energy efficiency projects. Higher energy rates mean that the ROI for certain efficiency projects could now meet your organization’s thresholds. Additionally, these projects can help you hit any sustainability goals you may have.
- Review options. Look at 24- to 48-month energy pricing now. You don’t necessarily need to act but reviewing rates can at least give you a starting point to build your buying strategy. Also, knowing your options gives you the ability to act quickly if opportunities arise.
- Consider a “layered” approach. For mid-size and large energy consumers, one approach that our clients have looked into is to lock a portion of your usage, instead of all of your usage, for some term. This gives you the flexibility to lock additional layers if we see future opportunities in the market.
So, is this increase in natural gas prices a short-term issue, or will it eventually spill over into long-term rates?
A wise person once told me, “The market is always right.” Right now, the market is saying “No, it won’t spill over.” But it wouldn’t hurt to protect your budget and have a game plan in place in case the market changes its mind.
Have other questions? Feel free to reach out to our advisors for a more in-depth review of your needs.