Natural gas prices rose to a near two-year high amid concerns of a cold-blast winter in the northern hemisphere. Signs of a US lower supply, as indicated by EIA data, further fuelled the price surge.
Natural gas prices surged to a near two-year high due to concerns over a cold winter, geopolitical uncertainties, and supply constraints.
Benchmark natural gas futures rose to $3.66 per million British thermal units (MMBtu) in the Asian session on Friday, making the highest since January 2023, and are up 40% year to date.
Concerns about rising demands and decreasing supply
The open interest in gas futures indicates that traders are concerned about increasing demand amid a cold winter.
The average temperatures in the northern hemisphere, including Europe, China, and Japan, are expected to fall below averages this year, likely leading to rising heating demands.
According to a report by EBW Analytics Group, the natural gas price rise was “primarily boosted by weather forecasts for mid-January cold,” and daily heating demand could surge 18 billion cubic feet into the weekend.
On the supply side, intensifying geopolitical tensions between Russia and the West may cause further sanctions on Russia’s gas supply.
Furthermore, working natural gas inventory decreased by the week ending 13 December, a net withdrawal of 125 billion cubic feet from the previous week, according to the US Energy Information Administration (EIA).
Main suppliers of natural gas are the US and Norway
The US and Norway became the primary suppliers of natural gas to Europe after Russia’s aggression on Ukraine in 2022. Prices soared to over $10 MMBtu in August 2022 but dropped to a four-year low of $1.53 MMBtu in late February due to oversupply after the US ramped up production.
To stabilise prices, major US producers, including EQT and Coterra Energy, reduced output in August.
Natural gas prices rebounded from $1.88 MMBtu in late August to the current $3.6 MMBtu, representing a 190% surge in four months.
The production disruptions caused by Hurricane Rafael in the Gulf of Mexico have also contributed to the bullish trend in November.
In the near term, natural gas prices may remain volatile amid the Trump presidency. The US president-elect will likely encourage an increase in fossil fuel supply, making the supply and demand more balanced.
Demands to rise amid the AI boom
The long-term demand outlooks remain bullish. Natural gas is expected to be a primary power source for tech firms to build their massive data centres amid the intensifying artificial intelligence race.
According to S&P Global Commodity Insights, “global power demand will increase by a third in the next ten years, including data centre demand”, and “natural gas will play an important role as a baseload source of power.”
Natural gas is expected to add 47 gigawatts per year between 2024 and 2035.
Wells Fargo analysts forecast a 20% increase in electricity demand driven by the energy requirements of AI infrastructure by 2030.
With tech companies facing growing scrutiny over their carbon footprint, many are turning to cleaner energy sources.
However, as renewable energy alone cannot meet the rising demand, natural gas is becoming a critical component of energy supply.
Goldman Sachs predicts natural gas will account for some 60% of the power needed by AI operations, with the remainder coming from renewable sources.