Colder Winter Could Propel Prices Higher

The price of natural gas has dropped 16% last week, but the U.S. Energy Information Administration (EIA) is of the view that higher prices are possible in the future despite several economic indicators raising questions.

Natural gas witnessed a decline of 34% this year and a 69% drop from its August 2022 high. The price of the commodity closed on the spot market at Henry Hub on Friday at $3.03 per million British thermal units (mmBtu) compared to $6.59 mmBtu a year ago and appears set to bounce from there.

The U.S. Energy Information Administration (EIA) anticipated U.S. natural gas inventories would end the winter heating season 21% above the five-year average with almost 2,000 Bcf in storage. According to the agency inventories are full because of high natural gas production and warmer-than-average winter weather, which reduces demand and hence keeps the price supressed.

Source: TradingView

The record oil and natural gas production in the U.S. this year has caused large build-up in inventories and EIA projects the records being set in 2023 will be broken in 2024. The gas storage sites in the EU were 99.6% full the first week of November, according to data from Gas Infrastructure Europe, which is a result of a combination of demand destruction and high LNG imports up until May this year, meaning there is reduced need for additional LNG.

In Europe traders started withdrawing natural gas from Europe’s record-high inventories this week as the weather turned colder and heating demand rose. These were the first consecutive net withdrawals from Europe’s gas storage since April, which is the end of the previous winter heating season.

Despite the nearly full inventories, Europe is not out of the woods yet as a cold winter and potential supply disruptions could tip the balance into deficit and send prices soaring. Europe’s gas demand could begin to rise this winter with higher electricity consumption in major markets and improving industrial demand in the Eurozone.

However, for now, Europe’s natural gas demand continues to be weak after last year’s energy crisis and most of the demand destruction will likely be permanent, according to France’s utility giant Engie.

Rising demand for liquefied natural gas (LNG) in the top importing regions of Asia and Europe hasn’t been enough to spark an increase in spot prices yet. Prices have so far failed to get their usual seasonal bump as demand remains relatively subdued and supply is plentiful, especially from the United States.

This leaves the spot price at the mercy of demand, and while there has been some uptick in both Asia and Europe, it hasn’t been enough to drive spot prices higher. Nonetheless, colder weather could propel a rally and we see prices in the range of $3.80 to $4.00 as achievable in the coming months.

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