Autumn has arrived in the Northern Hemisphere and natural gas prices have been racing higher.
The steep rise has been driven by a combination of lower supplies (gas storage levels in Europe are well below their five-year average), a strong recovery in demand as well as several weather-related factors. These include a particularly cold and long heating season in Europe last winter, and a lack of wind in the North Sea.
The gas market chaos is also being blamed on disruptions of imports piped from Russia and Norway, which supply nearly half of Europe’s gas.
The Old continent’s energy shortage has European governments warning of blackouts and factories being forced to shut while officials are already starting to talk about sending aid packages to individual households to help them cover their sky-high winter bills.
But the upward pressure on gas prices is global as natural gas markets around the world are connected.
While gas prices in Europe have gone up more than 250% in Europe, the U.S. has seen a 100%-plus surge. U.S. production change averaged 46bcf per week in the summer, below 52bcf last year.
Unprecedented heat stoked air conditioning demand across the world’s largest economy. As a result, less gas was put into storage for winter months, during the key summer injection period.
“Anything closer to [or colder than] a full standard-deviation form average would likely trigger a price spike to cause demand destruction with gas above $10/mmBtu,” Goldman Sachs analysts note. Gas prices were last that high in 2008.
In China, the world’s biggest buyer of natural gas, imports are almost the double from last year’s levels as the country hasn’t filled stockpiles fast enough. In Brazil, imports are also near record levels as the country faces its worst drought in almost a century, hurting hydropower output.
Nations are more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and are trying to outbid one another for supplies as exporters move to keep more for themselves.
“Utilities and policymakers are praying for mild temperatures because it’s already too late to boost supplies. The prospect of accelerating energy costs, in conjunction with squeezed supply chains and food prices at decade highs, could make more central bankers question whether the jump in inflation is as transitory as they’d hoped.” Bloomberg wrote.
Gas prices will be on central banks’ radar as the surge in prices carries major market implications
“If we have higher inflation, transitory or structural, and have slower growth – it will be a very tricky situation for markets and central banks to assess, navigate and communicate,” Piet Haines Christiansen, chief strategist at Danske Bank told Reuters.
Simply put: Higher gas prices raise the risk of stagflation – high inflation, low growth. More headaches ahead.