A sudden thaw in the northern hemisphere has melted down natural gas prices, turned bleak forecasts of energy shortages on their head and derailed Vladimir Putin’s plan to pressure Europe this winter.
It’s not expected to remain as mild as Wednesday, when temperatures in New York hit 66 degrees Fahrenheit, but forecasts, which energy traders are monitoring, call for unseasonably warm weather extending into February and demand for heating oil reduced.
US natural gas futures for February delivery ended at $4.172 per million British thermal units on Wednesday. That’s down 57% from summer highs, notwithstanding a 4.6% gain on Wednesday that sparked a four-session losing streak, including an 11% drop on Tuesday.
The price is now about the same as it was a year ago, when temperatures were also warmer than normal and before Russia’s invasion of Ukraine rocked energy markets.
The slump bodes ill for Bohrer, whose shares were among the few gainers in the stock market last year. Cheaper gas is good news for households and manufacturers whose budgets have been stretched and profit margins squeezed by high fuel prices. Although cold shocks and pipeline issues could still push regional prices higher, cheaper natural gas should help cool inflation in the coming months.
There are also major geopolitical implications. Mild weather is also driving gas prices down in Europe, bringing relief to the region as the winter faced the possibility of power outages and factory closures. The war has thrown energy markets into chaos, but benchmark European natural gas prices are now less than half a month ago and the lowest since the February invasion.
The drop comes as a welcome surprise to European governments, which have allocated hundreds of billions of dollars to protect consumers and businesses from high energy prices. Moscow last year cut off gas supplies to Europe in what European officials described as an attempt to undermine military and financial support for Kyiv.
So far, Russia’s strategy is not working. Warm weather is curbing demand, as are European Union efforts to curb consumption. But analysts say prices could spike again in Europe as the continent tries to restock for the winter of 2023-24 without much Russian gas.
PHOTOS: How a 102-year-old maritime law affects today’s heating bills
In addition to being burned to heat about half of America’s homes, natural gas is also used for cooking and to make electricity, plastic, fertilizer, steel and glass. Last year’s high prices were a key driver of the steepest inflation in four decades.
With prices peaking in August, the question arose as to whether there would be enough gas for the winter, given record consumption by domestic generators with few alternatives, and demand in Europe, where the race to replace Russian gas is on.
Now the market is asking how low the prices will go.
They were already falling as the storm brought snow to northern towns and stranded travelers in late December. Cold temperatures led to large depletion of US natural gas supplies and frozen wells in North Dakota and Oklahoma. At its peak, the storm shut down nearly 21% of US gas supplies, according to East Daley Analytics, a gas consultancy.
The surge in demand and supply disruptions were fleeting and failed to offset forecasts of mild January weather. Prices were also pushed lower by another delay in restarting an export facility in Texas. It has been offline since a fire in June left much of the gas in the domestic market that would otherwise have been shipped overseas.
Temperatures above 60 degrees Fahrenheit are forecast around the Great Lakes and along the Ohio Valley this week, while highs in the Southeast could reach into the 80s.
Subscribe to Newsletter
Alert Markets
Important financial market and trading news.
Measured in heating degree days, a population-weighted measure of temperatures below 65 degrees Fahrenheit, this week will be twice as warm compared to normal, as the last week of December was cold, said Eli Rubin, senior energy analyst at gas trading firm EBW AnalyticsGroup.
The company estimates that warmer weather in the first half of January will reduce gas demand on this route by about 100 billion cubic feet. That’s roughly the amount of gas the US produces each day. The Energy Information Administration estimates that daily American production will hit a record in 2022.
Analysts expect similarly strong production in 2023. They expect the year to go by without new LNG export capacity for the first time since 2016, when the U.S. began shipping LNG overseas from the Lower 48 States were put into operation.
“The market is moving from a winter scarcity mindset to a prospect of ending the winter with more storage capacity, ramping up production and not adding new LNG exports,” said Mr. Rubin. “If anything, the market looks oversupplied.”
Analysts have reduced their gas price assumptions as well as their forecasts for producers as the first few weeks of winter pass without sustained cold spells.
Gabriele Sorbara, an analyst at Siebert Williams Shank, told clients this week that he expects natural gas prices to average $4.25 in 2023, versus a pre-interglacial forecast of $5.50. As a result, he downgraded shares of EQT Corp., the largest US producer and one of the best-performing stocks in the S&P 500, from “buy” to “hold” over the past year.
“EQT will be dead money until estimates are recalibrated and a recovery in natural gas prices is visible,” he wrote in a note to clients.
SHARE YOUR THOUGHTS
What price changes are you seeing on your natural gas bill this winter? Join the conversation below.
Hedge funds and other speculators have been generally bearish on natural gas prices since the summer, betting on falling prices rather than gains, according to data from the Commodity Futures Trading Commission. Analysts said that’s probably the safe bet.
“We continue to caution against any attempt to bottom out in prices,” trading firm Ritterbusch & Associates told clients this week.
– Joe Wallace contributed to this article.
Write to Ryan December at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8