Natural gas price has been on an upward trend since the beginning of the year, reaching a three-year high of 3.10 USD per million British thermal units (MMBtu) on August 16, 2023. The main drivers behind this rally are the increasing demand for natural gas in various sectors, especially power generation and industrial use, and the limited supply growth due to low investment and production disruptions.
Demand for Natural Gas Surges Amid Heat Waves and Economic Recovery
One of the key factors that boosted the demand for natural gas is the extreme weather conditions that hit many parts of the world in the summer of 2023. Heat waves in North America, Europe, and Asia increased the need for cooling and air conditioning, which in turn raised the electricity consumption and the use of natural gas-fired power plants. According to the U.S. Energy Information Administration (EIA), natural gas accounted for 40% of the U.S. electricity generation in July 2023, up from 36% in July 2022.
Another factor that contributed to the rise in natural gas demand is the economic recovery from the COVID-19 pandemic, which led to more industrial activity and consumption. Natural gas is widely used as a feedstock for various industries, such as chemicals, fertilizers, plastics, and steel. As these sectors resumed their operations and increased their output, they also increased their demand for natural gas. For example, China, the world’s largest natural gas importer, reported a 15% increase in its natural gas imports in the first half of 2023 compared to the same period in 2022.
Supply of Natural Gas Struggles to Keep Up with Demand
While the demand for natural gas has been growing steadily, the supply side has been facing several challenges that limited its growth. One of the main challenges is the low level of investment in new natural gas projects, especially in North America, where shale gas production has been declining due to low prices and environmental concerns. According to Rystad Energy, a Norwegian consultancy firm, North America’s natural gas production is expected to fall by 2% in 2023 compared to 2022, while its consumption is expected to grow by 4%.
Another challenge that affected the supply of natural gas is the production disruptions caused by various factors, such as maintenance issues, technical problems, geopolitical tensions, and natural disasters. For instance, in August 2023, a major pipeline explosion in Iraq disrupted the flow of natural gas from Iran to Turkey and Iraq, reducing the supply by about 10%. In addition, hurricanes and tropical storms in the Gulf of Mexico also disrupted the offshore natural gas production and exports from the U.S., which is one of the world’s largest natural gas exporters.
Outlook for Natural Gas Price Remains Bullish
Given the strong demand and tight supply situation, analysts expect that natural gas price will remain bullish in the near future. According to Economies.com
However, there are also some risks and uncertainties that could affect the natural gas market and price in the coming months. These include:
- The development of the COVID-19 pandemic and its impact on the global economy and energy demand.
- The level of inventories and storage capacity for natural gas in different regions, especially in Europe and Asia, where storage levels are below average due to high consumption and low imports.
- The weather conditions and their influence on the heating and cooling demand for natural gas.
- The geopolitical situation and its effect on the production and transportation of natural gas from major exporting countries.
