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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Cold Weather Pushes Gas Prices Above $3

The weather doesn’t always follow traders’ hopes and expectations. However, it sometimes exceeds them. December and January saw a surge in natural gas prices in Asia as a cold spell caused a boom in electricity and heating demand. Now, U.S. gas prices are also enjoying an improvement, albeit a lot more moderate than the $30 per mmBtu the Asian spot market saw last month. The front-month Henry Hub contract for natural gas topped $3 this week after the first Nor’easter for the year brought snow and low temperatures to the U.S. Northeast. What’s more, the cold spell may last a while, keeping prices higher.

“The extension of cooler weather forecasts today underscores the weather volatility’s current capacity to drive rising demand for natural gas,” said gas consultancy Gelber & Associates, as quoted by Investing.com.

“Nearly 75-80 Bcf of natural gas demand is expected to have been added as a result, magnified by much of the additional cold falling during the week. The forward curve continues to shift along with March, adding a few cents through the end of next winter.”

Additional demand is always good news in a market that has been recently struggling with oversupply. This improvement in demand is also evident in recent draws in the U.S. natural gas inventory, likely to be extended this week.

“The unseasonably cold weather is expected to arrive this weekend and stock around through next week… The polar blast could mark some of the coldest temperatures seen this winter in much of the U.S.” Wood Mac analyst Mark Spangler said in a note to clients this Monday.

Related: Oil Prices Continue To Rise As Bullish News Mounts

A week’s worth of cold weather will be good for gas prices, but the rally will only last as long as the cold spell lasts. The good news for gas is that demand for it is set to rebound beyond the winter price boost, too.

The International Energy Agency said in its quarterly gas market report that it expected natural gas demand was about to start improving and it would rebound to pre-pandemic levels as soon as this year, much faster than oil.

In 2020, global natural gas demand dropped by 2.5 percent, which although a much smaller drop than the one experienced by oil, was the biggest demand drop for gas on record. This year, according to the IEA, gas demand will gain 2.8 percent as the world recovers from the pandemic, essentially returning to growth mode.

Tighter supply of natural gas will also help. In the United States, specifically, lower oil production prompted by the pandemic also meant lower gas production as a lot of the gas the U.S. produces is associated gas from oil wells. With oil output still lower than before that pandemic, so is gas output.

Indeed, based on this production trend, energy analyst Robert Rapier recently forecast the average gas price this year will be 25 percent higher than last year’s, at $2.50 per mmBtu.

As for global gas prices, the recovery will be uneven, reflecting the uneven recovery of economies in different parts of the world, the IEA said in its report in late January. This echoes demand projections for pretty much every commodity, with Asia expected to lead the way in demand recovery while other regions lag behind.

Whatever the pace of gas demand recovery and the uncertainty that surrounds the pandemic, what with all the new variants that have now made an appearance in the U.S. as well, gas is set for a better year than oil. LNG, in particular, will enjoy stronger demand, according to analysts, as long as Covid-19 lets up, especially in Europe.

By Irina Slav for Oilprice.com

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