Journally Speaking: Levels high, prices high

Nov. 1, 2021

Crude oil prices, rising steadily since November 2020, have been widely reported. West Texas Intermediate (WTI) oil futures front month contract steadily rose to near $83/bbl in mid-October 2021 from $37/bbl early in November 2020. The price increase overshadows the slow, steady recovery period of $20-40/bbl from April to October 2020 from the COVID-19 pandemic and the OPEC–Russia production fiasco which crashed prices from February to April 2020.

Now, high natural gas prices are in the spotlight. Henry Hub post-COVID prices recovered from a low of $1.33/MMbtu on Sept. 21, 2020, to $5.92/MMbtu mid-October 2021. Prices fluctuated from $2.50-3.50/MMbtu during October 2020 to May 2021, while averaging $2.95/MMbtu during that same time.

According to the Energy Information Administration (EIA), US natural gas production for third-quarter 2021 could match the pre-pandemic peak of 3.324 tcf from December 2019. EIA analysts predict that third-quarter 2022 could see even more production. High natural gas production typically would prompt low gas prices in basic supply-demand economic practice. But “there’s the demand side of the equation to consider as well,” Mercer Capital reported in an industry update Oct. 22. “Since the 2020 COVID-induced demand decline, the increase in natural gas demand has exceeded production recovery. Therefore, a supply versus demand imbalance has pushed prices up at an unusual rate,” the firm continued.

Exports are the main contributing factor to the disproportionate demand, setting records in both 2020 and 2021. Europe and China are two regions driving demand for US exports. Europe has experienced much colder than usual winters, forcing natural gas inventories to be well below seasonal levels. Natural gas prices in Europe are four to five times higher than what Americans are paying. Producers are logically going to export the natural gas to collect the higher prices from Europe.

“China has become concerned in regard to its country-wide fuel security and is facing a winter fuel supply gap,” Mercer Capital said, citing Reuters. “That, in the midst of Asian gas prices that have increased more than 400% in 2021, has led to advanced talks between top Chinese energy companies and US LNG [exporters] for the purpose of locking-in future US LNG export volumes,” the firm continued.

Higher costs this winter

With the higher demand for exports of natural gas, US consumers can expect to pay higher prices to heat their homes this winter, according to the update. Natural gas heats nearly 50% of all homes in the US. Historically, natural gas has been the best economic value for heating residences. The EIA expects homeowners to shell out nearly 30% more in fuel costs than last year, the firm said.

Other industries could experience glitches in production due to higher natural gas prices this winter. Many have been forced to reduce production and pass higher costs on to the end-consumer. To ease energy related expenses, members of the Industrial Energy Consumers of America, on behalf of chemical, food, and materials manufacturers, has requested that the US Department of Energy constrain US LNG exports.

“The market forces at work in the supply and demand for US produced natural gas are many and come from both domestic and foreign sources,” Mercer Capital said. Disparity in supply and demand of natural gas has increased prices to record levels.

Use of natural gas for home heating will ramp up during the winter months, accounting for about 25% of total US consumption, based on December 2020 EIA data. Volumes of natural gas delivered for industrial consumption and electric power generation will reach nearly 25% and 39%, respectively. Expect to see your electric bill trend higher as well, as costs pass through to the consumer.