U.K. natural gas prices are up 200% since July. Dutch European Union title transfer facility gas prices are up 350% since April. Even U.S. liquefied natural gas prices are trading close to values of $110 a barrel. Brent. These are moves one would be accustomed to seeing in a cryptocurrency or some dodgy NFT -- or non-fungible token -- gimmick.
But we're talking about the price of an actual commodity that has a purpose and a use: gas.
And gas goes into everything: heating, industry, homes. Over the past few weeks, prices are going parabolic and there is talk of a real winter shortage and a supply crunch. Some generalists are talking about how Brent, too, soon should see the same parabolic moves as we see in gas prices currently. It is important to remember that what we are witnessing in gas markets, is not a commodity-wide phenomenon, it is about a single commodity that has a massive demand surge outpacing supply in a very short window of time.
The most important fact about commodities, especially ones like gas and electricity, if you need it, you will pay whatever price it is on the day to get it. If you do not, then prices can fall to zero, even if there is no demand. There is no ceiling and no floor, and there is no cartel to protect the market.
The only way to curb any price rallies is to see demand destruction as in plants shutting down, given very high operating costs, or supply playing catch up. Now the latter takes time to show up, hence, it is the former that takes place first usually. We are seeing this today as fertilizer plants are shutting down, given uneconomical gas prices. The very unique feature of gas is that during the summer, there was an injection period whereby the system collects enough gas in storage to be at a certain level such that it can service the winter heating months. This summer we are exiting the summer period with very low levels, which bodes a rather precarious state for the gas markets as winter approaches in Europe and in the U.S.
Part of the reason for the shortage in EU gas has been Russia sending less gas to Europe. This is one of the reasons why they have been pushing for NordStream 2, so that they can supply more to the E.U., a very contentious topic for Germany. The U.K. and parts of E.U. are reliant on wind farms, which have not been generating enough electricity. That's why we have the push back to gas, making matters worse. Also, many plants have switched out of coal, given the clean climate agenda, but these plants are now coming back to avoid a crisis. So much for clean energy and climate change. If the system never lets it get to a point whereby producers are compelled to invest in infrastructure, then we can never wean off the dirty forms of energy.
Demand from LNG has been strong in Asia. This has been pulling U.S. exports away from their market making U.S. gas supplies tighter. As U.S. shale closed down wells last year after the oil price collapse and promise of "discipline" to return cash back to shareholders, there is talk of now increased drilling. After all, can you blame them with Henry Hub trading north of $5.
The lack of enough injections into U.S. storage can see a spike, if the winter is harsh in the northern hemisphere, as well. As you can see, all stars aligned correctly to get power and gas prices to reach where they have. One can back out the price of LNG to say it is about $140/bbl. Brent, but there is no direct connection as in it is not fungible. To call Brent and oil prices to play "catch up" to gas is an absurd notion.
Oil prices are driven by gasoline, distillate and jet fuel; product demand, so to speak. Oil supply is managed by a price cartel called OPEC. If it were open to a "free market," oil prices would be much lower from here, but OPEC+ has done a great job in managing it over the past year. There is no doubt that if we enter fourth-quarter winter hemisphere demand to be stronger -- at the same time Asia an China start ramping up demand -- Oil price could see a move into high $80s or more. But a lot has to happen for it to get there. Only time shall tell, but at the moment OPEC+ is on auto-drive releasing 400,000 barrels per day each month until December.
It is anyone's guess how fourth quarter global demand will shape out to be, and whether travel will resume as normal. There are a lot of ifs, whens, and buts, but it is important to understand that each commodity is driven by its own demand vs. supply metrics which is much more important than looking at the "macro" tape. And not to mention, the "macro" too is debatable right now with Fed Chair Jerome Powell pondering over when and how to taper, if at all.
