Several factors causing high natural gas market prices this summer

There has been plenty of national media coverage regarding the rise in gas prices for vehicles. But not so much regarding the rise in natural gas prices. U.S. natural gas prices have been increasing since the 2020 pandemic year, recently hitting its highest commodity price since 2008 before falling slightly in late June.

For perspective, the market spot price for natural gas was in the low $2 per MMBtu range in 2020. Since then it climbed to nearly $9 per MMBtu before falling into the $7 range in late June.

Several factors are putting upward pressure on market prices, all relating to the interplay between supply and demand. The current high market price is the result of a low supply/high demand environment. Natural gas storage levels remain significantly less than the five-year average this summer. Contributing factors include:

  • Natural gas production decreased significantly during the 2020 pandemic year.
  • After the 2020 pandemic year, demand (usage) in the U.S. increased, while production has lagged behind.
  • More natural gas is being used for electric power generation, which contributes to lower supply.
  • Exports of Liquified Natural Gas (LNG) are steadily rising, especially to meet the demand in European and Asian markets where many countries have banned the import of Russian natural gas.
  • A forecasted hot/dry summer is creating significant demand for natural gas and limiting injections into storage. U.S. Energy Information Administration (EIA) forecasts indicate storage levels will be at or below the five-year average by the end of injection season in October.

The U.S. Energy Information Administration (EIA) projects natural gas production to slowly increase to better meet demand. This is expected to lessen upward pressure on the natural gas market price in 2023. The EIA expects natural gas prices to fall back into the $4-5 per MMBtu range in 2023 and 2024.

The National Public Gas Agency (NPGA) uses a mixed portfolio of gas supply to mitigate market price spikes including seasonal and long-term hedging strategies, and municipal prepaid gas supply for a balanced approach to gas supply. Through NPGA’s board-directed hedging program, a portion (approximately 50 percent) of members’ anticipated use is hedged more than a year in advance. This serves to levelize the cost of gas, mitigates forward-exposure to commodity risk and provide savings to members during times of a rising spot market. Because of NPGA’s hedging program, participants’ average gas cost per MMBtu is estimated at $4.73 instead of the average market-based rate of $8.04.

“No one likes paying high natural gas prices, whether it’s a residential customer, a business owner, or a municipality,” said Beth Ackland. “But through various strategies and a balanced approach of purchasing gas supply that has been implemented by the NPGA Board of Directors, we can at least lessen some of the full impact of the current high market.”

Impacts to wholesale electric markets
High natural gas prices are also a growing concern for the electric power industry, especially in regions that rely more heavily on natural gas for power generation such as the East Coast. Natural gas power generation tends to set the marginal price in wholesale power markets so as natural gas prices increase so does the price of electricity.

The Federal Energy Regulatory Commission (FERC), in its 2022 Summer Reliability Assessment of the bulk electric grid, warned that expectations of a hotter than average summer could increase electric demand, creating demand for natural gas that is expected to outpace supply growth.