Why have US natural gas prices risen to their highest level in 14 years?

New York (CNN Business) – prices natural gas In the US, they’ve jumped to levels not seen since 2008, an increase that threatens to offset the benefits of lower prices at gas stations.

Natural gas futures rose 7% on Tuesday to settle at $9.33 per million British thermal units, the highest settlement price since August 1, 2008.

Although natural gas futures prices fell a bit on Wednesday, they are still up 70% since the end of June. Natural gas is up a staggering 525% since it closed at $1.48 in June 2020, when Covid-19 shut down much of the US economy.

The rise in summer is partly due to high demand, as scorching temperatures across much of the country force Americans to turn on air conditioners. This, in turn, undermined the relatively low inventory levels.

“We’ve had this perpetual heat wave cooking America,” said Robert Yauger, vice president of energy futures at Mizuho Securities.

As temperatures drop in fall and winter, the increase in natural gas is a surprising sign for families. Natural gas is not only a leading fuel source for the electric grid, but it is the most common way to heat homes in the United States.

“Depending on the weather, the winter could be tough,” said Rob Thummel, senior portfolio manager at Tortoise Capital Advisors. “But not as challenging as in Europe. They risk running out of natural gas. We don’t.”

Natural gas prices in Europe are seven times higher

The natural gas crisis in Europe is driven by its energy dependence from Russia, which has led to a significant reduction in natural gas flows to Europe in response to Western sanctions.

The European Union has had to come up with plans to ration natural gas, a drastic move that will hurt families and businesses. Natural gas prices have soared in Europe that they threaten to push the continent’s economy into recession.

For context, natural gas prices in Europe are trading at levels equivalent to about $70 per million British thermal units, according to Andy Lipow, president of Lipow Oil Associates. This is seven times higher than prices in the United States.

But that’s a bit of a relief to Americans struggling with high prices in supermarkets, clothing stores, and restaurants.

Despite the increase in natural gas prices, oil prices fell, which helped push gasoline prices significantly lower. The national average for regular gasoline has fallen 64 days in a row, according to the American Automobile Association (AAA).

Recovery of exports to Europe

Analysts say the natural gas crisis in Europe is contributing to higher natural gas prices in the United States, although it is not the main factor.

“High international prices are going to the US,” Tummel said. “Natural gas has become a global commodity with the advent of LNG.”

The United States has increased its exports of liquefied natural gas to Europe in an effort to mitigate the impact of the loss of Russian gas.

“Every replacement molecule we can find, we’re going to ship to the eurozone,” Jauger said.

Natural gas production in the United States is late

But the biggest problem facing natural gas in the US is the fact that inventory levels are below historical averages, making the market less protected and driving up prices.

“We started this year at very low levels and we never caught up,” Jauger said.

Supply has not been able to keep pace with the strong demand for gas. Tummel noted how US oil and gas producers have come under pressure from Wall Street to spend less on expensive drilling projects and more on dividends and shareholder buybacks.

“We need more natural gas production in the United States,” Tummel said. “Production levels are very low.”

The good news is that higher prices will eventually stimulate more production. Investors are not betting that today’s high prices will continue. The futures market indicates that natural gas prices should fall by about 50% in the same period next year.

On the other hand, a year ago very few people believed that natural gas prices would be at 2008 levels. Yet here we are.