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Commodities Corner: U.S. natural gas prices just hit a 13-year high. Blame coal, say analysts

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Natural-gas futures settled Thursday at their highest price since December 2008, with a rise in coal prices, tight supplies and global worries about energy supplies contributing to a price gain of more than 70% for the fuel so far this year.

U.S. natural-gas prices are “sensitive to any near-term supply concerns created by events like a ban on Russia coal exports, abnormally cold weather,” or Russian natural-gas export issues, given tight global supplies, said Rob Thummel, portfolio manager at Tortoise.

Natural-gas inventories stand at around 17% below their five-year average in the U.S., with the Energy Information Administration pegging stocks at 1.382 trillion cubic feet for the week ended April 1. In Europe, stocks are around 20% below their five-year average, said Thummel.

On Thursday, the May natural-gas futures contract
NGK22,
+4.81%

NG00,
+4.81%

settled at $6.359 per million British thermal units, the highest front-month finish since Dec. 2, 2008, according to Dow Jones Market Data.

The rally in the fuel’s price has also come as average weekly Central Appalachia coal prices, the U.S. benchmark for eastern coal, stood at $106.15 per short ton on April 1, up $8.85 from a week ago and at the highest since 2008, according to data from the Energy Information Administration. The run up in coal prices has led to higher demand for natural gas.

Coal often “displaces” natural gas when natural gas becomes so expensive, it supports the use of coal instead, Thummel told MarketWatch.

However, global coal inventories are low and global coal production has steadily declined, he said

Meanwhile Europe has proposed a ban on coal imports from Russia. The Group of Seven leaders said in a statement Thursday that they will “expedite our plan to reduce reliance on Russia for our energy, which include phasing out and banning Russian coal imports.” They also said they’ll accelerate their work to reduce their dependency on Russian oil.

A ban on Russian coal would likely reduce coal inventories even more, pushing the price of the commodity higher, said Thummel.

Natural-gas prices would rise correspondingly with the higher coal prices, at a time when natural-gas demand remains “robust” despite higher prices, he said. That’s partly due to “inability to switch to cheaper forms of energy.”

European natural-gas prices have been high since last summer, when inventories of the commodity dropped below historical levels, and supplies of the fuel could drop even more if imports from Russia are reduced or halted, Thummel said.

More liquefied natural gas supply from “reliable sources” such as the U.S. can help offset that and refill European inventories this summer, but he points out that Europe and Asia will compete for the limited global LNG supply that isn’t yet under contract.

Asia may opt to increase its use of coal to generate electricity, given higher natural-gas prices in the near term, he said, adding that the move would be “disappointing from a decarbonization perspective.”

Still, that would divert more LNG tankers to Europe, allowing European natural-gas inventories to refill and easing some price pressures, he said, referring to that as the “best” near term solution.

For now, Russia “represents so much of the natural-gas supply to Europe that it can’t be halted,” said Thummel. It can, however, “be replaced given time.”

Longer term, the best long term solution for Europe would be increased LNG imports from the U.S., as well as a continued build out of renewables like wind and solar, and renewable fuels such as biomass, he said.

Demand for U.S. natural gas, specifically in the form of LNG, is forecast to rise and is likely to be largest driver of higher natural-gas demand in the U.S. going forward, said Thummel.

He expects U.S. prices to remain elevated between $5 and $6 in the short term because of strong global demand but in the long term, prices could fall back to the $3 to $4 level “providing the U.S. a competitive advantage as a low cost fuel that can be decarbonizing when it displaces coal,” he said.

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