The price of natural gas futures in the US increased to $9.33 per million British thermal units (MMBtu) on August 16, 2022, the highest level since August 2008. The price of natural gas in the US became volatile and reached all-time high due to weather-driven demand, increase in exports of liquefied natural gas (LNG), and Europe’s resolve to move away from Russian fuel.
Natural Gas in the US
According to the US Energy Information Administration (EIA), natural gas accounted for about 38% of the electricity generated in the US in 2021. In addition to being a major source of fuel for the electric grid, natural gas is most widely used for home heating in the US. In recent years, the gas market in the US became extremely volatile due to the exponential growth of LNG exports and the increasing role of natural gas in the US electric grid. In the short- to medium-term, gas prices in the US will likely continue to fluctuate as the country exports a greater portion of its domestic production in the form of LNG, especially due to the tight gas market globally.
Europe’s Energy Crisis
In Europe, gas prices have skyrocketed as the continent grapples with a historic energy crisis caused by Russia’s export restrictions, unexpected outages, and a heat wave that increased the demand. The US increased its LNG exports to Europe in an effort to lessen the effects of the loss of Russian gas. The US is exporting record amounts of LNG to Europe to assist its EU allies in their attempts to fill gas storage facilities. This led the US to become the world’s largest exporter of LNG in the first half of 2022.
Natural Gas Production in US Lags Behind Demand
The growth in natural gas production in the US has been relatively flat and has not kept pace with the growth in demand. Consequently, inventory levels fell below their historical averages, leaving the market with inadequate buffer and led to increase in prices. The natural gas inventories in the US are not accumulating as they usually do due to increasing exports, hot weather, and sluggish growth in production. Due to limited supplies in the US and Russia’s decision to restrict the flow of energy, prices are expected to increase in the future.
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