Q&A: What’s Up with Natural Gas Prices?

Mark Green
Posted November 3, 2021

Natural gas prices around the world have risen over the past few months, in some places reaching record levels. In Europe and Asia, prices have hovered near $35 per metric million British thermal unit (MMBtu), more than four times their long-term averages and equivalent to more than $200 per barrel of crude oil. U.S. natural gas prices have also risen, though much more modestly, hovering around $5/MMBtu the past few months and even briefly rising above $6/MMBtu.

Even with the recent increase, the U.S. continues to have the lowest natural gas prices among the world’s major users. The fact that the U.S. is the world’s largest natural gas producer and has ample domestic production has largely insulated U.S. consumers from global price spikes. Still, price increases have been noted by consumers and businesses alike, especially heading into the winter heating season when natural gas demand hits its peak.

Rapidly rising global demand for natural gas over the past decade has been driven by its versatility – possessing unique attributes for power generation, advantages as a heating and cooking fuel and its key role in the production of cement, fertilizer, glass and many other processes. Natural gas has a relatively low emissions profile, with about half the carbon dioxide emissions of coal. The use of natural gas in place of coal fosters even greater reductions of nitrogen oxide, sulfur dioxide and particulate matter. For all those reasons, natural gas is in high demand.

Below, in the first of two Q&A blogs with Dustin Meyer, API vice president of Natural Gas Markets, explains what has caused natural gas prices to increase around the world and in the U.S.

Q: Why are natural gas prices rising globally?

A: There are many reasons, and different regions of the world have different dominating factors. Let’s just say what we’ve seen is a rare confluence of events that could be deemed a “perfect storm” for putting upward pressure on global natural gas prices.

What we’ve seen recently is that global demand has risen along with the economic recovery from the pandemic. After an anomalous 2020, this year represents a return to a decade-long historical trend of strong global demand growth for natural gas. Yet, while demand has risen, global gas supply has been largely flat, which puts upward pressure on prices. And across nearly every demand region, a number of individual factors have combined to leave global markets quite tight.

Look at China – long the world’s largest driver of natural gas demand growth. This year China’s natural gas demand has increased by about 20% year-on-year, which is stunning. In South America, low hydropower output has led to increased regional gas demand and more upward pressure on prices. In Northwest Europe, unexpectedly low offshore wind production in August and September increased demand for gas in the power sector, putting upward pressure on prices.

All this comes after both Europe and Asia experienced a colder than average winter followed by a warmer than average summer. Both increased natural gas demand and consequently left gas storage at multi-year lows—another key contributor to high prices.

In contrast to the U.S., many of these regions are heavily dependent on natural gas imports and have relatively little domestic production. For example, European natural gas production, from Norway and the Netherlands, has continued to fall this year, and Russia – Europe’s largest gas supplier – diverted some of its production to refill domestic storage instead of increasing flows to Europe. More upward pressure on prices.

Finally, natural gas often competes against coal in power generation, which some regions switch back to when gas prices increase. However, global coal prices have also risen sharply this year.

This is the 30,000-foot view. The result is that market dynamics are stretching in advance of meeting peak demand this winter. Because of this, there’s a lot of upward pressure on heating and electricity costs and an especially cold winter could present risk of physical shortages in countries that lack secure supplies.

Q: Why are natural gas prices rising in the U.S.?

A: As I mentioned, natural gas prices in the United States remain far below global prices, and the U.S. continues to have the lowest natural gas prices among major consuming regions in the world. Still, U.S. prices have increased – especially compared to last year’s pandemic-driven record-low prices.

For the past two months, U.S. Henry Hub natural gas prices have averaged $5.30/MMBTU compared to a $3.11/MMBTU 10-year average and a $3.22/MMBTU winter average. U.S. natural gas prices have risen in recent months due to a cold 2020-21 winter, persistently strong power sector demand during a warmer than average summer, weak hydropower output in the western U.S., a busier-than-usual nuclear maintenance schedule and relatively modest new production growth. All have contributed to lower gas storage levels, which is a key indicator heading into peak winter demand.

Typically, higher prices could spur more natural gas production and/or less demand in the power sector. However, what we’ve seen is U.S. gas production remaining largely flat as producers grappled with the workforce and supply-chain limitations that have impacted so many industries and paid down debt.

Further, gas demand in the power sector has remained relatively strong despite high prices due to hot summer weather keeping electricity demand elevated, and reduced fuel switching because of higher coal prices and significant plant retirements in recent years.

According to the U.S. Energy Information Administration, many Americans could see higher gas and power bills this winter though they may be somewhat insulated by utility hedging programs and various state consumer protection mechanisms. The EIA expects U.S. natural gas prices to return closer to average levels after winter as demand falls and production ramps up. Further, the EIA continues to expect U.S. natural gas prices to remain low in the long-term.

Q: What's the role of policy, including climate policy, in what’s happening?

A: Every country is different, but at least in the U.S., it’s a little difficult to draw an immediate connection between current market dynamics and specific existing policies. There are definitely some regions of the country – the Northeast, for example – which routinely have faced higher natural gas prices due to state-level policy restrictions on building much-needed gas infrastructure.

Still, the overall situation is a good reminder of the importance of remaining energy independent as opposed to relying on imports. It wasn’t that long ago that the U.S. was projected to be the world’s largest gas importer, but that’s changed dramatically over the past decade thanks to the shale revolution (we’re actually now among the world’s largest gas exporters).

Retaining this advantage requires prudent energy policymaking that recognizes the importance of domestic production and the challenge of meeting energy demand in a reliable, affordable way.

Next: Liquefied natural gas exports and impacts at home and abroad.