Natural gas prices in Europe, Asia, and the United States are rising, as natural gas and oil demand increases faster than supply. Dutch natural gas prices, which are the benchmark futures contracts for the EU, are currently trading at six times the value of U.S. prices. The EU gets most of its natural gas from Russia via pipeline and supplements the balance via liquid natural gas from the United States. The European and Asian natural gas prices are benchmarked off the benchmark oil price, increasing to 8-year highs. With demand exceeding supply, volatility could likely continue to generate opportunities as well as risks. Those who want to take advantage of this volatility could do so by commodities trading with iFOREX as CFDs..
Why Are Oil Prices Rising
Oil prices are rising due to supply constraints in the wake of the spread of COVID-19. At the onset of the pandemic in the spring of 2020, the lockdowns reduced oil demand significantly. For example, the number of people who passed through the TSA checkpoints to travel on airlines in late March of 2020 dropped from more than 2.5 million in 2019 to below 200,000 in 2020. A decline matched the drop in air travel in the number of drivers on the road and trucks delivering merchandise. As oil demand dropped off a cliff, supply also declined. The volume of oil produced by the United States and OPEC was reduced substantially to match the drop in demand. According to figures from the Energy Information Administration, crude oil production in the United States dropped from approximately 13 million barrels a day to below 10 million barrels a day.
It took a while for the decline in supply to match levels of demand. The unwind of the lower market was accelerated with the rollout of the COVID-19 exams. Lockdowns ended, and people started traveling. TSA numbers began to increase, and gasoline demand perked up. Unfortunately, supply has not been able to keep up with oil demand, which has pushed oil prices up to multi-year highs. The number of active rigs pumping oil is less than half the number recorded at the peak in 2019. The volume of oil produced from the United States is still down 15% year over year. OPEC has also been slow to increase the volume of oil it is producing.
Despite oil prices rising from below zero for WTI to above $84 per barrel, OPEC said it would stick to the gradual increase in output. This inflationary pressure could derail the economic rebound coming from the rollout of the vaccine. From OPEC’s point of view, the group of countries is concerned about a COVID-19 surge that potentially could create new lockdowns and push prices back down.
Why are Natural Gas Prices Higher?
Natural gas prices are also rising and have reached multipage highs, especially in Europe and Asia. In Europe, the move to a “green” environment has reduced the number of ways that certain countries will produce electricity. Many countries are focused on air quality and creating sustainable energy. In Europe and Asia, where most countries are net importers of natural gas, oil prices are hiking. With oil prices surging, natural gas prices have moved higher in tandem.
In the United States, the issue is more about pipeline capacity and getting natural gas to the right location. There is so much natural gas in the United States that some locations are still flaring natural gas that is unavailable despite higher prices. Flaring is the controlled burn of natural gas in locations with too much gas and no outlet to use it. Flaring occurs in many oil-producing states like North Dakota that do not have storage or pipeline capacity. According to the EIA, in 2019, North Dakota and Texas accounted for 85% of the vented and flared natural gas.
Natural gas storage has also declined in 2021. Gas in storage is below the 5 year average for this time of year. Prices reflect a typical winter, but prices could move even higher if there is a colder than expected winter in the United States.
The Bottom Line
The upshot is that oil and natural gas prices are rising globally because of supply chain issues and production. Demand rebounded as the vaccine rollout allowed people to get back out on the road and start to use air travel. Gasoline demand rebounded, but production by the United States and OPEC has failed to meet current demand levels, pushing prices to multi-year highs. Natural gas is also experiencing a rise in demand. Europe and Asia need to import natural gas, and these prices are benchmarked to oil prices. Natural gas prices in the United States are also climbing, as supply remains below average for this time of year. A colder than usual winter could generate a surge in demand, pushing prices to fresh highs.