The risk is that an early winter or extremely cold fall temperatures will force households to increase heating. This would further reduce below-average natural gas inventories for the country and could push prices even higher.
“If we have an early freeze it could get ugly. It could get ugly quickly,” said Robert Yawger, director of energy futures at Mizuho Securities.
“It would be bad enough, even in normal times. But now there is this general fear of inflation,” said Robert McNally, chairman of consultancy firm Rapidan Energy Group.
The American Gas Association, which represents natural gas utilities like Con Edison, noted that “natural gas utility customers don’t pay the daily natural gas prices that we see in the headlines,” said spokesperson Jake Rubin in a statement.
Indeed, AGA pointed out, its members buy gas under long-term contracts that freeze prices and protect customers from some of the volatility. Rubin added that utilities are increasing winter supplies with the storage of gas purchased months earlier.
“Catastrophic” gas crisis in Europe
“It’s disastrous,” McNally said.
“There is no way we will run out of natural gas. We will survive,” Yawger said.
Supply cannot catch up with demand
So why have natural gas prices increased so sharply? The central problem is that while economic activity has rebounded, natural gas production has not. This means that demand returns faster than supply, forcing prices to rise.
Demand was further boosted by the heat waves that swept through the country this summer. The high temperatures have increased the use of air conditioning and the demand for electricity.
The situation was exacerbated by unplanned production shutdowns in Norway and Russia as well as Hurricane Ida, which took the vast majority of Gulf of Mexico oil and gas production offline.
US supply was further reduced by strong foreign demand against a backdrop of high international prices. U.S. exports of liquefied natural gas are expected to average 9.6 billion cubic feet per day this year, up 48% from a year ago, according to the EIA.
And then there is the role of hedge funds and other big traders on Wall Street. Yawger said speculators rushed to raise natural gas prices when they realized storage levels were unusually low.
“It was a perfect storm, with specs rushing to take full advantage of it. It’s spec nirvana,” he said.
The good news is that some on Wall Street say the rise in natural gas could get out of hand.
Last week, Bank of America wrote that the winter risk premium embedded in natural gas prices has “reached excessive levels.” The bank expects natural gas prices to drop in the last three months of the year and drop next year.
The energy transition will not be easy
Soaring natural gas prices come at a delicate time for governments around the world. Not only are they facing high inflation, but world leaders are also trying to move away from fossil fuels.
Today’s high energy prices are a painful reminder of how reliant the global economy is on fossil fuels – and how difficult, and potentially unpopular, it will be to get rid of it.