have hit their highest levels since 2014, outpacing oil and many other commodities. On Monday, natural gas futures were trading up 2.6% to $5.09 per million British thermal units (BTUs), their highest settlement price since February 2014. Natural gas prices are up 117.6% in the year-to-date, while the biggest nat. gas benchmark, the United States Natural Gas ETF, LP (NYSEARCA:UNG) is up 88.6% over the timeframe. The sticker shock is even greater in other key natural gas markets around the globe, with East Asian benchmark futures and European natural gas spot prices have climbed 4-5 times year-ago levels to $18 per MMBtu.
Yet, some experts are now saying that this rally is far from over.
Stan Brownell, an analyst at Argus Media, and Luke Jackson, an analyst at S&P Global Platts, figure that Henry Hub prices would have to jump to $10 or more to provide an incentive to fulfill domestic natural gas demand.
That would mean a doubling of natural gas prices from current levels to levels last seen in 2008 when the U.S. produced about 40% less natural gas
International natural gas demand is booming
An unusually cold winter in Europe as well as a global rebound from Covid-19 have triggered strong demand and depleted natural gas inventories. Meanwhile, Hurricane Ida has knocked out a considerable amount of gas production, with 77% of oil and gas production still offline in the Gulf of Mexico. According to U.S. government statistics, natural gas inventories are currently 17% lower compared to a year ago and 7.4% below the five-year average.
To catch up to the five-year average storage level by early winter, U.S. natural gas producers need to inject roughly 90.4 billion cubic feet each week from now, about 40% higher than the five-year average weekly buildup clip. The latest data by the Energy Information Administration shows that nat. Gas inventories climbed 52 bcf last week, way below what is required to build enough stockpiles for the winter.
Interestingly, the analysts note that U.S. consumption isn't really the driving force behind the strong price action. Indeed, according to data from the U.S. Energy Information Administration, domestic natural-gas consumption through June was in line with 2020 levels.
The real culprit here is robust international demand for natural gas as well as a fast-growing U.S. LNG sector.
In the first half of the year, the U.S. exported roughly 10% of its natural gas, or 41% more than a year ago. Normally, excess natural gas produced during the summer would go into underground storage. But that domestic stockpiling has been lower than normal, with producers exporting much of it as LNG.
Source: U.S. Energy Information Administration
Asia and Europe still need to stock up more to prepare for the winter, and much of their supplies will have to come from the U.S. because non-U.S. LNG exporters have mostly been down with maintenance-related snags. For instance, Russia, Europe's most important natural-gas provider, has been slowing its deliveries. Natural gas inventories in Europe are currently a whopping 16% below the five-year average and at a record low for September. Meanwhile, continuous unplanned outages at LNG export facilities in several countries, including Australia, Malaysia, Nigeria, Algeria, Norway, and Trinidad and Tobago, have contributed to increased demand for U.S. LNG.
Europe's natural gas spot prices have historically been lower than prices in Asia; however, this year, Europe's natural gas prices are tracking Asia's spot LNG prices more closely to attract flexible LNG supplies from around the world to refill storage inventories.
A severe winter in the U.S. could lead to domestic markets having to compete with hungry Asian and European buyers, thus driving prices even higher.
The U.S. Henry Hub natural gas benchmark and U.S. LNG spot market prices have been lower than prices for international natural gas and spot LNG this year. This price difference has supported record volumes of U.S. LNG exports. U.S. LNG exports also increased because of new export capacity added in 2020. The final liquefaction units were commissioned at Freeport, Cameron, and Corpus Christi LNG, and the remaining small-scale units were placed in service at Elba Island LNG. The new units increased total U.S. LNG export capacity by a combined 2.7 Bcf/d for a total peak capacity of 10.8 Bcf/d.
Similar to 2020, Asia remains the top destination for U.S. LNG exports, accounting for 46% of the total exports during the first half of the year. Asia was followed by Europe, which had a six-month average share of 37%. Exports to Latin America also increased, particularly to Brazil, which is experiencing its worst drought in more than 90 years.
A severe winter in the U.S. could easily lead to an even crazier surge in natural gas prices.