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After an extremely cold Christmas holiday in the United States, most areas are now experiencing a warming trend. Temperatures in Europe have also been above normal.
As a result, natural gas prices are falling in both regions. Even though winter is only half over, there are no cold snaps forecast for the immediate forecasts, so natural gas traders are selling the commodity as though winter demand for natural gas has peaked. However, winter technically just began, and the situation could easily change before it’s over.
The temperature in the U.S. and Europe is an important factor, but here are other factors to consider: weather and economic conditions in Asian countries, the pace of industrial slowdowns in Europe, and whether windy weather persists in Europe.
Natural gas-reliant economies like the United States and Europe have been lucky so far this winter. Aside from a cold spell in late autumn in Europe and frigid Christmas week in the U.S., temperatures have been mild. Wind power generation in Britain and Germany has been strong due to windy conditions.
Overall demand for power in Europe has been lower than expected, and European countries have not needed to institute blackouts to conserve fuel – a situation that was presumed likely once they cut off all Russian natural gas imports.
The arctic blast experienced in the United States over Christmas week did cause a major draw in natural gas stockpiles and caused natural gas production to decline in some places where wells froze, but only about 21% of U.S. natural gas production was impacted for a few days.
This is likely to be mitigated by warmer temperatures in January. Some analysts predict that the warmer start to the new year will save 100 billion cubic feet of natural gas during the first few weeks of January. For reference, the U.S. produces this much natural gas every day. This will help replenish U.S. natural gas stocks for the rest of the winter.
Natural gas is priced regionally, not globally, because, unlike oil, it is more difficult to transport across oceans. However, the spot price of LNG is impacted by conditions in various parts of the world.
For example, right now, warm weather in Asia (especially China) keeps natural gas demand down in those regions. Because many Asian economies rely on imported LNG, the spot price of LNG cargoes is lower, helping Europe afford more LNG.
Europe has also benefitted from a drop in LNG demand from developing countries like Pakistan and Bangladesh, which essentially halted LNG imports earlier in the season because they could not afford the high prices. As a result, their natural gas stocks are very low and they are experiencing blackouts and shutdowns.
For example, Pakistan shut down markets and shopping centers mid-December and told government employees to work from home to conserve power. Many European natural gas-reliant industries also reduced output earlier in 2022 due to high natural gas prices and have yet to resume production.
Natural gas prices could quickly skyrocket if these conditions change and the demand for natural gas increases. European companies could decide to increase industrial output because prices are lower now.
Developing countries could resume LNG purchases if they receive help from the IMF. If less windy conditions emerge, countries like Britain and Germany that rely on wind power generation will increase their natural gas use and will also have to purchase electricity from other countries.
According to meteorologists, the current warmer temperatures are due to a polar vortex that is keeping arctic air in the arctic. Though there are currently no signs that it will weaken over the next few weeks, this could change in February.
Winter isn’t over, and a cold blast could easily occur well into March or even April. Several weeks of below-average temperatures in Europe and/or the United States could deplete the cache of natural gas that has been built up. In this event, prices will rise, and Europe could again be on the precipice of blackouts.
Disclosure: The author does not own any of the securities mentioned in this article.
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