Natural gas prices are soaring in the UK, Europe and Asia as a result of the global energy crunch. However, experts say they are unlikely to carry over to the United States.
Much will depend on what the winter brings in terms of weather conditions. But the U.S. is better positioned heading into the colder months, given that it’s the world’s largest natural gas producer and that inventory levels are not as depleted as they are in Europe.
“We’re at a unique point in time now where just all energy prices are going up,” Francisco Blanch, head of global commodities, equity derivatives and cross-asset quantitative investment strategies at Bank of America Merrill Lynch, said last week on CNBC’s “The Exchange.” “The U.S. is much more insulated from this global energy trend than the rest of the world,” he added.
U.S. prices could still be volatile, however. Natural gas futures settled at their highest level since December 2008 on Tuesday. On Wednesday, the contract traded as high as $6.466 per million British thermal units (MMBtu).
But the volatility abroad is far more extreme. Analysts at Deutsche Bank noted that in Europe prices are up fivefold, while in the U.S. and Asia prices are about 1.5 times higher. In Europe, the price spike in natural gas is equivalent to if oil were trading around $200 per barrel.
“The importance of these moves on inflation, growth and external accounts are not to be underestimated,” the firm wrote in a note to clients. “These price moves are a big deal.”
Coal and oil prices are also jumping. West Texas Intermediate oil futures, the U.S. oil benchmark, topped $80 per barrel on Friday for the first time since November 2014. International benchmark Brent crude, meanwhile, traded at its highest level since 2018. Analysts say that elevated natural gas prices could even prompt utilities to swap the fuel for oil.
Several factors are fueling the price surge in natural gas and commodities such as oil and coal more generally.
Demand is rebounding as economies get back to business and consumers return to pre-pandemic activities. At the same time, producers, who suffered through 2020’s unprecedented downturn, have been slow to increase their output.
A harsh 2020 winter meant that European inventory levels were below average heading into the fall. On top of that, slow wind speeds and dry conditions weighed on renewables’ energy output. Carbon offsets can be 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 last two decades, and the continent now depends on imports from Russia. The country has limited supplies to Europe this year in what some have called a politically motivated move, even as President Putin indicates he will boost Russia’s output to alleviate pressure on Europe.
Asian demand is also jumping as countries including China look to shift away from dependence on coal. In some cases, cargoes are bypassing Europe for Asia, where they can get better prices.
Nevertheless, while the U.S. has its own power problems, analysts insist the same price jump and energy crunch playing out in Europe and Asia is unlikely to happen.
″[The U.S.] hasn’t had to rely on the rest of the world to provide its supply, and that’s really what Europe’s problem has been,” said Robert Thummel, managing director at TortoiseEcofin.
He noted that the shortage stems not from a lack of supply, but rather from a lack of infrastructure — specifically for liquified natural gas.
“You’re not going to see the U.S. to the rescue here, because there’s just not enough infrastructure on either side — on the U.S. side or the European side and most importantly on the Asian side — to solve this,” he added.
At the end of the day, Thummel said his forecast for natural gas prices all comes down to weather. A normal winter could see prices stay slightly elevated in the $3 to $4 range, while warmer-than-expected temperatures could see a retreat to between $2.50 and $3. Conversely, if temperatures drop prices could spike into the double digits.