Dropping temperatures in the United States and Europe have prompted a rally in U.S. natural gas prices. Although somewhat hesitant, this rally could help avoid a shortage in the not-too-distant future.
Winter is peak demand season for natural gas as demand for readily available, baseload electricity shoots up. This year has been no exception. In Europe, Germany’s gas consumption surged by 79% in November from October—the biggest monthly increase in consumption ever recorded, Reuters’ Gavin Maguire reported.
Germany, as the rest of Europe, gets a lot of gas in liquefied form from the United States, driving demand there higher, too. This is already being registered. At the end of November, demand for natural gas from liquefaction plants on the Gulf Coast surged close to all-time highs, hitting 14.6 billion cu m on a single day. This was the highest daily demand rate since the start of the year, just a bit lower than the record of 14.7 billion cu m booked in December last year. There is still time to break that record, however, thanks to the low wind speeds in Europe.
These low wind speeds are what media report prompted the surge in German natural gas generation—and coal generation, too. But wind speeds are not something any country can organize its generation around, especially in winter. This means gas demand is going to grow further—and so will U.S. prices despite their continued vulnerability to any bearish news.
This vulnerability was demonstrated earlier this week when forecasts for warmer-than-expected weather in much of the United States prompted traders to sell, leading to a dip in prices to a two-week low. However, at the same time, speculators have been busy covering their short bets on natural gas in anticipation of higher demand. Their net position is now net long, energy market analyst John Kemp reported this week, at a sizable 664 billion cu ft, from a net short of 23 billion cu ft a week earlier.
This is significant in the context of record-high gas in storage, which the Energy Information Administration reported earlier this week. The working gas storage in the Lower 48 ended injection season at a level of 3.992 trillion cu ft, the EIA said on Monday, which was the highest level for the start of heating season since 2016. Meanwhile, output is trending lower in response to the prolonged depression in prices. With demand rising while output shrinks, the high level of gas inventories is not going to last for long—despite the mild weather forecasts.
The sooner this imbalance pushes prices consistently higher, the better for future supply security. It normally takes a few months before production in the shale patch catches up with demand on the upward curve of the oil and gas cycle after prices rise, motivating this increase in production. The longer it takes for that response, the greater the danger of a tight supply situation—because seasonal demand is not the only factor driving overall demand higher.
Natural gas producers are already in talks with Big Tech data center owners to supply reliable electricity for their artificial intelligence operations. They are committing future production, in other words, to the tune of between 3 and 6 billion cu ft daily, according to estimates from S&P Global Ratings. These estimates show data center electricity demand rising by an annual 12% between now and 2030. U.S. natgas prices are not going to stay low for long if those estimates turn out to be true. It then might be a while before they get depressed again by abundant supply.
By Irina Slav for Oilprice.com
