Dec 21, 2021 - Economy

Natural gas prices fall after warm start to winter

Source: FactSet (Henry Hub spot NYMEX); Chart: Axios Visuals
Source: FactSet (Henry Hub spot NYMEX); Chart: Axios Visuals

This past fall, surging energy prices were one of the most visible and alarming side effects of the world’s monumental effort to reopen economies all at once.

  • But just a few months later, a warm start to the winter — and worries that the Omicron variant will cause a slowdown — have cut the price of one of America’s main fuel sources nearly in half from its peak.

Why it matters: Natural gas is a major source of heating and electricity for American homes. Heading into the winter, these lower prices shouldn't cause the pocketbook shock that analysts had recently feared, as growing inventories change the pricing landscape.

  • Compare that to Europe, which doesn't produce its own gas and still faces steep shortages.

State of play: Rising prices in the U.S. often stem from the size of natural gas inventories held in storage.

  • In September, when prices were climbing toward their peak, storage levels had shrunk to 7.4% below the five-year average — thanks to a combination of the rapid demand increase from the reopening, the cooling needs from a hot summer, and then the disruption from Hurricane Ida, Sindre Knutsson, natural gas analyst at Rystad Energy, tells Axios.
  • But storage levels have recovered — in large part because of the unseasonably warm start to winter — and over the past few weeks are hovering right around the five-year average, according to the Energy Information Administration.

The EIA’s next weekly report will probably show a surplus to the average for the first time since February, analysts at BofA Global Research write.

The big picture: Weather can turn on a dime. A colder U.S. winter would likely deplete some of the inventory. But don’t expect prices to head back to the $5 or $6 area, Knutsson says.

  • More likely, are bouts of short-term volatility. "The market is much more healthy than it was" a few months ago, and can withstand a few cold snaps, he says.

Meanwhile: Oil prices have eased as well. U.S. crude had its worst day of the month yesterday, down 3.7% — and is off 19% from its November peak.

  • However, oil prices still face many of the same longer-term supply and demand dynamics that pushed them up in the first place, says Phil Orlando, chief equity market strategist at Federated Hermes.
  • And the Omicron economic cycle will pass, as other COVID waves have, he adds. “I expect energy prices in the first quarter of next year are going to be higher than they are now,” he says.

The bottom line: To some degree, that may depend on the weather.

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