The natural gas market is nothing if not volatile. In the first four months of 2021, the benchmark Henry Hub natural gas spot price rose from $2.54/MMBtu in January, increasing to $3.22 in mid-February and then fell to $2.46/MMBtu in April.
Since then, prices have jumped almost 50%. In the month of June alone, gas prices rose 20% and in early July prices reached $3.77/MMBtu, their highest since December 2018. But with prices dropping back this week, to $3.56/MMBtu, there are signs that this rally might be over.
Why the hike in natural gas prices?
This increase in prices partly reflects the global economic recovery from the Covid-19 crisis, although the most recent hike is thanks to the heatwave in the US and Canada. Essentially, record-breaking temperatures pushed up demand for natural gas, squeezing supplies which were already running low after a long hard winter.The US Energy Information Administration (EIA) also attributes higher natural gas prices this year to the growth in liquefied natural gas (LNG) exports in 2020. LNG exports to Asia increased 67%, and now account for almost half of all US LNG exports.
Rising domestic US natural gas consumption outside of the power sector has been putting pressure on prices too. Gas is now being used as a replacement for other more polluting fuels as part of the drive to combat climate change. The Biden administration has pledged to reach 100% carbon pollution-free electricity by 2035 and in June the G7 pledged to end support for unabated coal by the end of 2021.
In Europe demand for natural gas is anticipated to slow to an average 1.7% rate for the 2022-24 period according to the latest quarterly Gas Market Report from the Paris-based International Energy Agency (IEA).
Continuing demand amid price reversal
Despite the reversal this week, according to McKinsey, gas will be the strongest-growing fossil fuel and will increase by 0.9% from 2020 to 2035. It is the only fossil fuel expected to grow beyond 2030, peaking in 2037.
Whether natural gas is a cleaner fuel is still a hot topic, but according to the EIA, burning natural gas for energy results in fewer emissions of nearly all types of air pollutants and carbon dioxide than burning coal or petroleum products while still producing the same amount of energy.
Nitesh Shah, Director, Research at WisdomTree noted “As more countries sharpen their focus on meeting their obligations under the Paris Agreement to limit global temperature increases to just 2℃ above pre-industrialised levels, we believe the demand for US natural gas exports will rise.”
EIA price forecasts
The EIA in its July Short Term Energy Outlook, expects Henry Hub prices to rise to an annual average of $3.22/MMBtu this year, a rise of 30 cents. In 2022 however, the agency forecasts prices will fall to an average of $3.00/MMBtu.
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