U.S. Natural Gas: $10+ On The Horizon

• Natural gas futures hit highest price since 2008
• European prices hit all-time peak
• Russia will punish Europe
• US energy policy addresses climate change, but not geopolitical realities
• Next peak season could bring peak prices

NYMEX natural gas can be the most volatile of all commodities that trade in the futures arena. Trading on the CME’s NYMEX division began 32 years ago in 1990. The price of natural gas has ranged between $1.04 and $15.78 per MMBtu.

Meanwhile, the NYMEX price reflects natural gas at the Henry Hub in Erath, Louisiana. Prices at other locations across the US can trade at significant premiums or discounts to the NYMEX price, which is a benchmark. Over the past years, natural gas for local deliveries has soared to multiples of the benchmark during high-demand periods and below zero when gluts developed.

Technological advances that turn the gas into a liquid for export have expanded the addressable market far beyond the North American pipeline network. Natural gas has become a more international commodity. In June 2020, the price dropped to a 25-year low when it dropped below $1.45 per MMBtu. In May, nearby NYMEX natural gas future rose to a price that was more than six times the 2020 low.

Natural gas is a seasonal commodity, with price peaks coming as the winter and peak heating season approaches. We could see prices rise to over $10 and even challenge the 2008 and 2005 highs before the end of 2022.

US Natural Gas Futures Reach Highest Price Since 2008

In June 2020, nearby NYMEX natural gas prices reached a 25-year low of $1.44 per MMBtu.

Long-Term U.S. Natural Gas Futures Monthly Chart.

Source: Barchart

The long-term chart highlights the rally in natural gas that took the price over six times higher as of May 25, pushing the nearby contract over $9 per MMBtu. The most recent high came on May 25 at $9.168 per MMBtu, a price not seen since 2008, the last time natural gas traded over the $10 level.

European Prices Reach All-Time Peak

If you think US natural gas prices are high, you ain’t seen nothing unless you look at what is happening in Europe.

Long-Term UK Natural Gas Futures Monthly Chart.

Source: Barchart

Before 2021, ICE UK Natural Gas prices never traded above 1.17 pounds per 1,000 therms. In 2022, the price exploded to 800, but was at 148.88 on May 25, remaining above the pre-2021 all-time high. In May 2020, it dropped to a low of 8.09.

On May 25, while US natural gas prices were 6.1 times the price at the 2020 low, the UK and European prices were more than 16 times higher.

Russia Will Punish Europe

The Russian pipeline system supplies Europe with natural gas. Russia’s invasion of Ukraine, sanctions on Russia, and Russian retaliation have been a toxic bullish cocktail for global natural gas prices. While Russia is making European consumers pay for natural gas in rubles, it is also cutting supplies to “unfriendly” countries supporting Ukraine. Sweden and Finland’s plans to join NATO caused Russia to cut supplies to neighboring Finland.

Liquefying US natural gas expanded the addressable market for US exports far beyond the pipeline network. However, US inventories are at levels that do not support significant exports to replace Russian supplies to Europe.

Source: EIA

The chart shows that natural gas in storage across the US is 17.1% below last year’s level and 15.2% under the five-year average as of May 13. The low stockpiles and supply commitments to Asia make US exports to Europe challenging.

US Energy Policy Addresses Climate Change, But Not Geopolitical Realities

The days of 'drill, baby, drill' for US crude oil and 'frack, baby, frack' for US natural gas ended in January 2021, when the Biden administration began to fulfill its pledge to address climate change. Support for alternative and renewable fuels at the expense of traditional hydrocarbons handed oil and gas pricing power to the international oil cartel and Russia. The administration did not account for the geopolitical turmoil and inflation that would push fossil fuel prices to the highest level since 2008. Moreover, the Biden administration has chosen to continue on a green energy path, only exacerbating price increases. Oil product prices have risen to record highs in 2022, and oil and natural gas prices are on the same bullish path.

Meanwhile, the coming months could present another problem for natural gas, adding to the almost perfect bullish storm in the futures market. US natural gas infrastructure along the Gulf Coast comes under the threat of the hurricane season over the coming months. The 2005 and 2008 record peaks in natural gas came as Hurricanes Katrina and Rita wreaked havoc around the NYMEX delivery point at Earth, Louisiana.

While US natural gas prices reflect local supply and demand factors, the futures are based on the Henry Hub price. Moreover, the burgeoning export market has made US prices far more sensitive to Asian and European supply-and-demand fundamentals. The war in Europe has lit a bullish fuse under the US natural gas market as the 2022 hurricane season gets underway. Mother Nature could push prices to record levels if she unleashes a series of violent storms. The threat of a hurricane heading for the Gulf Coast could lift NYMEX natural gas prices north of $10 in the current environment, as they are approaching $9 on May 25.

Next Peak Season Could Bring Peak Prices

The all-time high in US natural gas future came in 2005 at $15.78 per MMBtu.

U.S. Natural Gas Monthly Chart.

Source: EIA

The chart highlights that the 2008 high of $13.694 is the first technical resistance level on the way to the 2005 record peak.

The 2022 hurricane season poses the first threat to a challenge of prices over the $10 level. Continuing hostilities in Europe could make the price fly to record levels in the fourth quarter of 2022 as the winter season approaches.

The path of least resistance for natural gas prices remains higher. While supply and demand fundamentals support higher highs, the potential for brutal corrections will increase with the price. Expect the unexpected in the volatile natural gas market, and you will not be disappointed.