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Natural gas futures: Will rising demand drive up spot prices?

By  Yoke Wong

Edited by Vanessa Kintu

11:12, 16 August 2022

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Blue flame on a gas stove
The natural gas price has seen multi-year highs since March Photo: yuratosno3 / Shutterstock

The US natural gas futures spiked over the past month as supply disruption amid strong demand and low inventory boosted the commodity prices.

Russian gas flow to Europe is currently at 40-year lows as the EU plans to cut reliance on Russian imports. Additionally, the continuing outage at Freeport, the second-largest US liquified natural gas (LNG) export plant, is causing supply concern in the market. 

The Freeport facility was shut on 8 June after an accident, the company has reached an agreement with the Pipeline Hazardous Materials Safety Administration (PHMSA) to resume partial operation in October.

The front-month Henry Hub natural gas futures traded on the New York Mercantile Exchange (NYMEX) increased to $8.868 per million British thermal units (MMBtu), up 40% compared with a month ago.

The NYMEX September contract hit a high of $8.874/MMBtu on 11 August, although the price has since eased slightly, it remained at around 14-year highs.

Natural gas futures historical performance

The natural gas price has been smashing new multi-year highs since March, as sanctions on Russia following the country’s invasion of Ukraine on 24 February led to the import ban of Russian oil, coal and gas in much of the world.

According to the International Energy Agency (IEA), Russia is one of the world’s top three crude oil producers and the second-largest natural gas producer after the US. Revenues from oil and natural gas accounted for 45% of Russia’s federal budget in 2021.  

The sanctions on Russia and the subsequent impact on the country’s exports led to volatility in gas spot prices globally, particularly in Europe, which relied heavily on Russian gas.

Consequently, the US natural gas price has been rising for most of the year and surged to hit a 14-year high of $9.34 MMBtu on 6 June. The last time US natural gas futures price surpassed $9/MMBtu was in June 2008, when the commodity briefly reached a peak of $13.45/MMBtu, NYMEX data showed.

Prior to 2022, natural gas spot prices were below $4/MMBtu in the first half of 2021 before rising briefly to $6/MMBtu but ended the year below $4/MMBtu.

Natural gas 5-year price chart

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What are natural gas futures?

The NYMEX natural gas contract in the US is the benchmark price in the country. The benchmark price is also known as the Henry Hub, named after a gas pipeline in Louisiana, which serves as the delivery point for NYMEX contracts.

According to NYMEX, the Henry Hub natural gas futures are the third largest physical commodity futures contract in the world by trading volume. The NYMEX futures are closely connected to the natural gas spot prices, reducing potential arbitrage between the two markets. 

Transactions for gas spot prices are conducted daily off-exchange during the weekdays, with buyers and sellers securing volume at physical market prices a day before delivery. In contrast, the futures contract specification is for forward delivery with a minimum contract unit of 10,000 MMBtu.

EU imports record volume of US LNG

In the past, Europe has relied heavily on Russian natural gas, accounting for about 45% of the EU’s total imports.

With Russia limiting gas flow through the pipelines, Russian export to Europe plunged to a near 40-year low. According to data from the US Energy Information Administration (EIA), Russia’s natural gas exports by pipelines to the EU and the UK fell nearly 40% in the first seven months of 2022, compared with the same period last year.

The average gas exports from Russia to the EU and the UK plunged to 1.2 billion cubic feet per day (Bcf/d) in mid-July, down from the average of 10.9 Bcf/d in 2021 and 12.4 Bcf/d in 2020 and 16.0 Bcf/d in 2019, reported EIA on 9 August.

Oil - Crude

80.87 Price
-0.430% 1D Chg, %
Long position overnight fee 0.0240%
Short position overnight fee -0.0439%
Overnight fee time 21:00 (UTC)
Spread 0.03

Silver

18.95 Price
+0.780% 1D Chg, %
Long position overnight fee -0.0120%
Short position overnight fee 0.0026%
Overnight fee time 21:00 (UTC)
Spread 0.020

Natural Gas

6.96 Price
+0.160% 1D Chg, %
Long position overnight fee -0.1297%
Short position overnight fee 0.0928%
Overnight fee time 21:00 (UTC)
Spread 0.005

Gold

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+0.460% 1D Chg, %
Long position overnight fee -0.0155%
Short position overnight fee 0.0055%
Overnight fee time 21:00 (UTC)
Spread 0.18
“To compensate for lower natural gas pipeline exports from Russia, the EU and the UK have been importing record-high volumes of liquefied natural gas (LNG) this year, particularly from the United States,” said EIA.

According to the US Department of Energy, Europe accounted for 64% of the US’s LNG exports in January to May 2022, compared with 32% in the same period in 2021.

LNG export destinations

The strong demand for US LNG exports has supported natural gas prices. In addition, the higher-than-normal temperatures across much of the US have led to increased demand for gas-fired electricity generation.

Natural gas prices are linked to weather and consequential changes in demand – when it’s cold, customers use gas-fired heating; when it’s hot, they utilise air conditioning, which uses electricity generated by gas-fired power stations. Weather has a bigger impact on spot prices than on futures prices.

EU plans natural gas demand cut, reduces reliance on Russia

Amid dwindling Russian gas exports to the EU, the EU council has responded with plans to cut consumption to safeguard supply for winter.

Daniel Hynes, senior commodity strategist at ANZ Commodities said on 14 August:

“With only two months before the winter heating season begins, European authorities are concerned they will not get through the winter if Russian gas remains at current levels. Germany is proposing additional energy-saving initiatives such as reducing the minimum temperature in offices.”

On 26 July, the EU announced its member states would be reducing its natural gas consumption by 15% this winter as part of the trading bloc’s energy security measures.

“In an effort to increase EU security of energy supply, member states today reached a political agreement on a voluntary reduction of natural gas demand by 15% this winter,” said the EU council.

The Council regulation warned that it “foresees the possibility to trigger a ‘Union alert’ on security of supply, in which case the gas demand reduction would become mandatory”.

According to the EU, member states have the discretion to implement measures of their own choice to achieve the planned consumption cut between 1 August 2022 and 31 March 2023.

However, member states can request a derogation from the demand reduction obligations if they have limited gas-flow interconnections to other member states.

Prior to July, the EU had already made plans to phase out Russian oil and petroleum products imports by 2023.

On 3 June, the EU announced it would impose further sanctions against Russia by implementing a complete import ban on all Russian seaborn crude oil and petroleum products, subjected to a six to eight month transitory period. 

This latest import ban is set to hit 90% of the current oil imports from Russia. According to the EU, the trading bloc imported €48bn ($48.94bn) worth of crude oil and €23bn of refined oil products from Russia in 2021.

Tight supply to support natural gas market

As a result of the supply tightness, analysts at Dutch bank ABN AMRO expected natural gas prices to remain elevated until 2025 to 2026, said Hans van Cleef, ABN AMRO’s senior energy economist on 18 July:

“Europe will remain strongly dependent on gas imports as local investments in gas exploration will remain very limited and the transition towards renewable alternatives will take years to materialise and decades to fully push natural gas out of the energy mix.

“Therefore, filling the inventories is an important step to prepare for the tight market conditions during the colder months of this and next year, but this does not provide

any guarantee whatsoever that there would be enough supply available to meet demand.”

When looking at a natural gas futures analysis and predictions it’s important to keep in mind that analysts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.

FAQs

What is the prediction of natural gas?

Many analysts expect natural gas prices to remain high in the short-to-medium term because of the supply constraint related to Russia sanctions. However, analysts’ forecasts can be wrong, always do your own research before making any investment decisions. And never invest money you cannot afford to lose.

Is natural gas a good investment?

Whether natural gas is a good investment for you or not will depend on your investment goal, portfolio composition and risk profile.

Are natural gas prices expected to rise?

No one can say for sure, but some analysts such as ABN AMRO expect gas prices to remain elevated until 2025 to 2026. However, analysts’ forecasts can be wrong. Always do your own research before making any investment decisions. And remember to never invest or trade more money than you can afford to lose.

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