Europe’s gas shortage could make everyone pay more to warm up this winter

Natural gas prices have risen more than 35% in the last month, as concerns grow, there is not enough gas stored for the winter if temperatures are especially cold in the northern hemisphere.

The generally quiet commodity market has intensified in recent weeks as investors focus on growing demand worldwide and supplies remain below normal. The most problematic area is Europe, where supply is at a record low at this time of year.

Even in the U.S., the amount of gas stored is 7.6 percent lower than the five-year average, according to recent data from the U.S. Energy Information Administration. Natural gas is a major fuel for heating and is responsible for approximately 35% of power generation in the United States, according to the federal agency.

“People are starting to throw the word‘ crisis ’around Europe,” said John Kilduff, a partner at Again Capital. He said natural gas stored in Europe is 16% below the five-year average, and that the level of storage is at a record low in September.

“Europe is behind all eight balls in the winter season. It will put the focus on this product that has been overlooked in recent years,” Kilduff said.

The turning point could come in a few months when it becomes clear what kind of winter lies ahead in Europe, and also in the United States. Some analysts say that in an extreme scenario, U.S. prices could double if there is a prolonged cold spell, especially in Europe where shortages could become severe.

“If the winter is slightly cold, it’s sure to be problematic,” said Francisco Blanch, head of commodity and derivatives strategy at Bank of America.

October natural gas futures jumped close to 5.3% on Monday, to about $ 5.20 per million British thermal units, or mmBtus. Natural gas has risen 106% to date and is the highest in more than seven years. But the equivalent gas in the European and Asian markets is over $ 20 per mmBtus.

“The U.S. is supposed to be an island, but in the last three or four years there’s been a growing bond between the U.S. and the world market,” Blanch said. “We’ve gone from 50% correlation to 95% correlation. The U.S. market is being dragged down by that.”

The United States has exported natural gas in the form of liquefied natural gas shipments. Shipments have grown to about 10 percent of U.S. production, analysts said. South Korea is the largest customer, followed by China and Japan, according to US government data. But buyers also include Brazil India, Poland, Spain, France and Portugal.

“If it’s a cold winter, the gas won’t just be tight. It’s going to be very tight,” said Daniel Yergin, vice president of IHS Markit. If this is the case, prices could rise sharply. “It will be a physical shortcoming or it will be reflected in the price.”

Strategists say that for now, global gas supply is expanding, but prices could go down if fall and early winter are mild and more gas is stored.

“We lean toward a lot of risk from price hikes, rather than ever-sustained higher prices,” said Christopher Louney, RBC commodity strategist.

Brian Lovern, chief meteorologist at Bespoke Weather, said the United States is in a state of La Niña, which could mean a warmer October and November in the northern United States.

Fewer days that require warming could mean more gas will go into inventory before the colder winter weather.

“I think in a few weeks the weather will give us some bearish winds [for natural gas] as we enter the October and November period. That doesn’t mean we won’t see a colder winter, ”he said.

European winter will depend on a weather pattern set in Greenland. “Early indications don’t indicate a big cold winter out there,” Lovern said.

The market is anxious for the repeat of last year, when a winter cold in Europe caused a larger-than-normal reduction in gas.

Supplies were not created enough in Europe and analysts said that Russia has recently reduced some exports to Europe. But the new Nord Stream 2 pipeline, which will bring natural gas from Russia to Europe, could solve some of the continent’s supply problems in the next two months.

Gazprom, of Russia, announced last week the completion of the pipeline, which had previously been opposed by the United States. The pipeline would allow Russia to double gas exports to Europe. The German energy regulator said Monday it has four months to complete Nord Stream 2 certification.

The situation in Europe has caught the attention of American officials. Amos Hochstein, the senior adviser to the U.S. State Department for Energy Security, told reporters Friday that he was worried about the supply and possible shortages if the winter is too cold.

Hochstein said deliveries of liquefied natural gas to the United States, known to the industry as LNG, could be increased, and that Russia is coming out of the period of low supply.

“There are different explanations of what is happening, of why Russian supplies are being restricted,” Yergin said. “Russian and German regulators are in a debate over whether to apply the new regulations that were put in place after the pipeline had made its final investment decisions.”

Yergin said Asian demand has also been a factor in the shortage of supplies. Demand for Chinese liquefied natural gas was 20 percent higher than expected, he said.

TortoiseEcofin senior portfolio manager Rob Thummel said Europe was also not getting enough liquefied natural gas loads to rebuild its inventories. “What happened was that Brazil’s hydroelectric power did not come to fruition,” he said.

“There was drought, so Latin America and Brazil needed natural gas,” Thummel added. During the European summer, “a lot of LNG … ended up in Brazil in particular.”

Supplies in Europe did not replenish and there was an increase in demand. “Asia and China in particular got nervous. They started buying LNG,” he said.

Thummel said he does not expect a serious problem for the United States this winter and prices could fall again. He said there has been an increase in the count of platforms in the Haynesville shale. “You’re likely to see higher volumes,” he said.

One of the problems in the United States has been the lower volume of shale oil production. A by-product of this production is natural gas.

“I would say U.S. price volatility won’t be the same as it has been, and it probably will be in Europe,” Thummel said. The amount of gas going into the winter is about 8 percent below the five-year storage average, but “it’s not the end of the world,” Thummel said.

As natural gas prices have risen, so have the stocks of gas producers, such as the largest EQT, Range Resources and Antero Resources. Investors have also jumped on the U.S. Natural Fund ETF, which is betting on the commodity.