Winter weather forecast: Natural gas prices jump with temperature set to fall
15:27, 14 December 2022
US natural gas prices rose for a fifth consecutive day on Tuesday and tested the $7.00/MMBtu level – supported by cold weather forecasts and subsequent higher heating demand expectations.
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Europe gas prices fall on milder weather outlook
Meanwhile, the price of natural gas in Europe on the Dutch Title Transfer Facility (TTF) fell by 4% to around €133.7 per megawatt-hour (MWh) in anticipation of the colder weather ending next week and easing demand.
“The ongoing cold snap in Europe has resulted in temperature forecasts that are significantly lower than historical levels. Met Office data shows that the average temperature over the next 7 days in UK/Germany is 1/-1 degrees Celsius, versus the 10 year average of 6/3 degrees Celsius,” analysts at Jefferies highlighted in an email sent to clients on Tuesday.
Other factors have also been weighing on the minds of traders including what impact the EU’s implementation of a cap on prices of the commodity will have on the market – a move yet to be implemented after a final decision was delayed on Tuesday.
A reason to be bearish on gas prices?
Analysts at Jefferies recently shared in a note emailed to clients its outlook on natural gas prices heading into 2023.
“Record level gas prices have prompted a material demand response in both Asia and Europe. Europe is where demand reduction has been surprising to the upside and where we are starting to see signs of permanent demand destruction. When we combine lower demand levels with record high gas inventories and a late start of the gas injection season, our supply / demand model shows that Europe may need fewer LNG imports during the gas injection season of 2023 vs. 2022, supporting the case for lower gas prices ($30/mmbtu) vs. current strip prices ($40/mmbtu),”Jefferies said.
However, the financial group said it sees material upside risks remaining.
“Despite a cautious view on 2023 prices (vs. strip), we see several areas of upside risk: One, further Russian supply cuts: we see up to 58bcm of Russian gas exports at risk in 2023 although these are not included in our base case as our discussion with Russia policy experts suggest that a supply side escalation is unlikely.”
Secondly, Jefferies’ analysts also noted that unplanned maintenance remains a wild card.
Thirdly, it said that power demand remains very vulnerable to unplanned nuclear outages and sudden drops in renewable generation.
Will there be a winter weather gas price shock?
Piero Cingari, market specialist at Capital.com, recently highlighted how US natural gas prices have actually exhibited very low average returns during the winter and coldest months of the year (December, January, and February), despite the fact that household consumption for heating is highest during this period.
He analysed data over the past 30 years and further explained why this is the case.
“Actually, when heating demand drops, natural gas prices rise. The two strong quarters for US natural gas prices are from March to May and from August to October, with September being the best month in terms of average returns. So, what causes this peculiar seasonal pattern? Natural gas prices tend to rise during the refill season. Demand for natural gas increases as a result of the need to restock supplies in advance of the winter months, pushing the price of the commodity higher.
“The winter demand spike can usually be met with a high level of gas reserves, barring major and protracted frosts, which may sometimes cause some price pressures,” he said.
However, US natural gas average monthly returns are historically high in September (12%) and October (8%), but low in December (-4.5%) and January (-3.5%).
“The gain frequency – a measure of the historical likelihood that a month will perform well – is also quite high in September and October (72% and 66%, respectively). In December (38%), January (31%), and February (31%), gain frequencies are well below the 50% threshold, indicating that there has been more negative than positive returns of natural gas prices in the winter months, and thus reinforcing the negative seasonal trend,” Cingari added.
The market specialist also noted that Europe's energy crisis, weather-related winter demand and technical issues will continue to have a huge impact on the global natural gas market.
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