Entering 2021, the price of natural gas is on the rise, becoming the biggest commodity gainer of the year.
In the first week of August, it was reported that gas prices in Europe rose to 14 euros per million British thermal units for the first time, while prices in the UK hit a 16-year high and gas prices in the Dutch trading hub hit their highest level since records began in 2014 at $13.1 per million British thermal units. Natural gas futures have doubled in the US from a year ago, jumped sixfold in Asia in the past year and tenfold in Europe in 14 months.
Natural gas has always been a relatively cheap source of energy because it is relatively easy to extract, has large reserves and is not used much around the world. Hit by the COVID-19 epidemic, the global demand for major natural gas markets in 2020 saw a decline of varying degrees. Global natural gas consumption was about 3.81 trillion cubic meters, down 3% from 2019, and global natural gas production was about 4 trillion cubic meters. Prices have hit record lows despite tepid demand.
A significant factor behind the apparent recovery in demand for natural gas entering 2021 is climate change.
This year, the world is experiencing frequent hot weather. Especially since summer, the northern hemisphere heat wave, gas demand surged. Summer is the natural gas consumption slow season, gas prices are rising. Even America, rich in reserves, is feeling the pinch.
Much of Asia is also hotter than its historical average, leading to a surge in electricity demand and a surge in JKM, the spot benchmark price for liquefied natural gas (LNG) in Northeast Asia, as some buyers prepare for winter heating. In the second week of August, JKM rose to its highest level since 2013.
In addition, in order to deal with global warming, many countries have launched a carbon neutral target, the control of carbon emissions is increasingly strict. Natural gas is a fossil energy source, but compared with oil and coal, it is cleaner. With lower prices making natural gas more competitive with alternative energy sources, many countries are choosing natural gas as a transition fuel to replace oil and coal, increasing demand for natural gas in the near term.
At the same time, the green transition in European countries has led to a rising carbon price in the European carbon market, with utilities switching to cleaner natural gas; Governments in South and Southeast Asia are also planning to build dozens of new gas-fired power plants to meet greater demand for electricity.
With limited capital to deploy, the government could choose to switch to natural gas and reduce emissions, said James Tevin, an analyst at Ihs Ihs. Natural gas is the cleanest fossil fuel, with nearly 50 percent fewer emissions than coal, while non-fossil fuel alternatives like wind and solar are in the relatively early stages of the energy transition.
As for future market trends, the IEA gas Market Report q3 2021 projects that gas demand will rebound strongly in 2021 and continue to rise further if governments do not implement strong policies to put them on a path to net zero emissions by mid-century. Barring major policy changes to limit consumption, gas demand will continue to grow over the next few years. Growth in natural gas demand is expected to slow by 2024, but demand will still reach nearly 4.3 trillion cubic meters, up 7% from pre-pandemic levels.
Short-term price trends, as the winter heating season approaches, will be supported by the urgent need to replenish natural gas inventories in some regions. According to nihon Keizai Shimbun, Europe's gas inventories are at low levels. Due to the cold wave that hit Asia at the beginning of the year and increased exports from the Middle East and the United States to Asia, European gas stocks stood at 633 terawatt-hours at the end of July, down 30 percent from a year ago and barely 60 percent of their storage capacity. Companies in Europe and Asia are competing for gas to avoid running low on stocks.
Gas prices are expected to hit record highs this winter, according to a Reuters report. Traders are betting that the winter average will surpass last year's peak, when freezing temperatures across North Asia sent LNG prices soaring more than 200 per cent to an all-time high.
As the supply of natural gas has not increased significantly, the Nihon Keizai Shimbun analyzed that if natural gas prices continue to rise, electricity and petrochemical prices in many countries, including Japan, are likely to be pushed up. Inflationary pressures are mounting, the cost burden on households and businesses is increasing, and the risk of a blow to the economy is rising.
China's three major national oil companies have a positive credit impact on long-term gas demand growth, moody's said in a recent review of the industry, noting that higher gas prices are unlikely to dent long-term growth in the country's natural gas sector as Beijing has set clear carbon emission targets. Moody's also said most LNG deals are on long-term contracts, making prices more stable than spot prices. At the same time, higher LNG prices will lead to increased supply, which will eventually drag down prices, although that is unlikely to happen in the near term.
