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Beryl May Threathen Core of U.S. Refining Industry

Beryl May Threathen Core of U.S. Refining Industry

Computer models show the storm's future…

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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Natural Gas Is Down and Will Stay Down This Summer

  • Decline in EU gas demand has suppressed gas prices.
  • Storage units are well-filled for the time of the year.
  • The combination of lower production in the United States and higher demand ahead of the winter heating season is almost certain to push gas prices higher.
Gas pipelines

This time last year, natural gas prices in Europe were shooting for the sky, and gas prices in the U.S. were beginning the climb that would bring them to $9 per million British thermal units later in the summer.

The price surge was caused by the drop in Russian gas flows to Europe and the latter's turn to U.S. LNG for its winter storage. Europe is still buying a lot of LNG from the United States this year as well. But prices are much lower than they were last year. And they're likely to remain low.

The first reason for the price drop was the decline in European natural gas demand. A warm summer led to lower energy consumption overall, and a bunch of determined governments calling for energy conservation did their part, too. Exorbitant electricity bills in most of Europe also helped keep consumption—and as a result, gas prices—low.

But even now, when Europe is once again buying gas to fill up its gas storage caverns for next winter, natural gas is less than $3 per MMBtu. The price of the commodity that ruled 2022 is less than half what it was a year ago, and that's despite higher demand in many parts of the United States, too, as summer gets into full swing.

The reason for the lower prices is, as could be expected, lower demand. It is true that Europe is buying liquefied natural gas. But it is buying a lot less than last year: because its storage caverns are not infinite, and there is still quite a lot of gas left in them from last year.

The United States itself did not use as much gas as expected because of a milder-than-expected summer. The Wall Street Journal recalls in a recent article that withdrawals from gas storage last winter were the lowest in seven heating seasons.

Production, meanwhile, remains abundant, even though drillers have been reducing the number of drilling rigs for eight weeks in a row now. By the week to June 23, the total rig count in the U.S. had fallen to the lowest since April last year. And this means that at some point, prices will begin to climb back up. Related: Oil Ticks Up After EIA Confirms Huge Crude Draw

It probably won't happen in the next couple of months, however. Unless the weather gets really hot, leading to a spike in energy demand and the resulting surge in gas-powered generation—or blackouts where there is not much gas-powered generation.

"if summer temperatures spike and become more widespread, the U.S. West, Midwest, Texas and Southeast, New England and Ontario (in Canada) may experience resource shortfalls," the North American Electric Reliability Corp warned last month.

The grid reliability watchdog cited insufficient generation capacity in some parts of the country as well as "generator vulnerability to extreme weather" as Reuters put it.

The NERC also pointed toward gas pipeline capacity constraints as one of the reasons for the increased risk of electricity supply shortages this summer. These constraints will probably help keep a lid on natural gas prices. If you can't use a commodity, you wouldn't buy it.

Going forward, however, the tightening of natural gas production would lead to higher prices as demand is not really going to drop sharply any time soon, despite efforts to enforce such lower demand with gas stove bans and pipeline rejections.

It takes a few months from the cut in drilling to the fall in output to manifest, so the change in price trends is likely to begin getting visible in the autumn. This will be unfortunate because a couple of months later, Europe will probably intensify its efforts to secure natural gas supplies for the winter as it begins dipping into its storage.

Many analysts have warned that it was not last year that was the real test of Europe's resilience in natural gas. It is this year—this heating season—that will be the real test because for half of last year, Europe received full Russian gas volumes and used them to fill those storage caverns. This year, the only Russian gas coming into Europe is the gas transited via Ukraine and through Turkey—a small part of the former total.

The combination of lower production in the United States and higher demand ahead of the winter heating season is almost certain to push gas prices higher unless we see a repeat of last winter with its mild temperatures.

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As to how high prices could go, that remains an open question, although chances are they won't go as high as they did last year, both because of still plentiful supply and also because of the decline in industrial activity in the recession-hit eurozone, which has brought energy demand down.

Once the supply drop kicks in, however, prices could go anywhere. And the supply drop will more likely than not kick in at some point because drillers in the U.S. are not cutting just the number of gas rigs. They are also cutting the number of oil rigs, which means less associated gas from oil wells—the same gas that ensured low gas prices last year and during the first months of this year.

By Irina Slav for Oilprice.com

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