Natural gas prices have surged to their highest levels in nearly two years, driven by worries about a colder-than-expected winter, potential supply shortages, and geopolitical instability. Benchmark natural gas futures reached $3.66 per million British thermal units (MMBtu) during the Asian session on Friday, marking the highest price since January 2023. This increase represents a 40% rise in prices so far this year.
A significant factor contributing to this rise is the anticipated drop in temperatures across the northern hemisphere, including Europe, China, and Japan. These regions are expected to experience colder-than-average conditions, which will likely result in a spike in heating demand. According to EBW Analytics Group, weather forecasts predict a cold mid-January, potentially leading to a surge in daily heating demand of up to 18 billion cubic feet. This growing demand, combined with supply constraints, has been a major driver behind the price increase.
On the supply side, the situation is equally concerning. Geopolitical tensions, particularly between Russia and the West, could lead to further disruptions in Russian gas supplies, while US natural gas inventories are already lower than anticipated. The US Energy Information Administration (EIA) reported a 125 billion cubic feet withdrawal from inventories in the week ending December 13, intensifying fears of tighter supplies.
The US and Norway have emerged as the main suppliers of natural gas to Europe after Russia’s actions in Ukraine, which disrupted the region’s supply. Prices soared above $10 MMBtu in August 2022 but then plummeted to a four-year low in February 2023, following an oversupply caused by increased production in the US. However, after major US producers such as EQT and Coterra Energy scaled back output in August, prices began to recover. By November, prices had rebounded sharply, aided by disruptions caused by Hurricane Rafael in the Gulf of Mexico, and they continue to hover around $3.6 MMBtu.
Looking ahead, natural gas prices are expected to remain volatile, with political developments and weather conditions influencing supply and demand. As the US faces a new presidential administration, potential changes to energy policy could further impact the balance between supply and demand in the coming months.
In the longer term, natural gas is poised to play a crucial role in meeting global energy demands, particularly as the race for artificial intelligence (AI) intensifies. With increasing electricity needs from data centres supporting AI infrastructure, natural gas is expected to be a key energy source. S&P Global Commodity Insights forecasts that global power demand will increase by a third over the next decade, with natural gas contributing significantly to this surge. Analysts predict that by 2030, natural gas will account for around 60% of the power needed by AI operations, with the remainder coming from renewable sources. As tech companies seek to reduce their carbon footprints, natural gas is becoming an essential part of the energy mix to meet growing demands.
Natural gas prices are likely to remain a focal point in the global energy market, driven by both short-term weather factors and long-term technological developments.
Diversified Energy Company plc (LON:DEC) is an independent energy company engaged in the production, marketing, transportation and retirement of primarily natural gas and natural gas liquids related to its U.S. onshore upstream and midstream assets.
