Natural gas prices surged more than 25 percent in November, due to forecasts of colder weather and increased heating demand in the key consuming countries. Similar price trends were witnessed in the key Asian and European markets as well. The recent rally in prices is due to active restocking of the rapidly declining natural gas inventories in Europe and Asia amid peak heating seasons. In addition, there are expectations that average temperatures across major natural gas markets including China, Japan and Europe are all set to slip below long-term average this year. This may result in a synchronized rise in natural gas fired heating demand which is likely to further lift natural gas prices.
At the same time, high storage levels in the United States continue to put pressure on prices. As the world’s top natural gas producer and consumers, the United States’ production currently exceeds consumption by approximately 13 percent.
According to the Energy Information Administration (EIA) report, US natural gas inventories are at their highest level since 2016, with the working natural gas in storage currently 6 percent above the five-year average.
The commodity has maintained an overall negative outlook in the last couple of years, with prices fluctuating between $1.40 and $3.65 per MMBtu levels in the WTI futures platform throughout this period. This was due to a complex interplay of supply and demand dynamics that adversely affected the outlook of the fuel. In March 2024, prices dropped to a four-year low due to lower demand and surplus supplies but later recovered moderately. In the domestic MCX futures, prices registered a low of Rs128.50 in March but recovered to Rs297 level in November.
A decline in demand due to less heating demand from key consumers like the US and Eurozone, the industrial slowdown in Europe, and record-high production and exports from the US reduced the overall outlook of the fuel.
Weather conditions can significantly impact the demand for natural gas. Warmer than normal temperatures across Europe and America were reported in the peak seasons last year, which led to a decline in consumption. The current forecasts of colder weather in the US and Europe are expected to drive heating demand and potentially support firmer prices.
European natural gas demand continues to decline due to energy efficiency measures, increased renewable energy adoption, and reduced reliance on Russian gas. Current data indicates Europe’s annual natural gas demand is around 330 billion cubic meters (BCM). However, the International Energy Agency (IEA) projects global natural gas demand has been increasing at a stronger rate in 2024 than the previous two years. The agency believes that demand has risen by more than 2.5 percent in 2024 with similar growth expected in the next year as well.
Fast-growing Asian markets and a potential rebound in European industrial gas demand are expected to contribute to this growth. The EIA predicts limited new gas supplies in 2024 due to slow production growth, with ongoing geopolitical tensions potentially fueling price volatility.
First published in Economic Times.
