Natural gas prices have declined in the past few days as concerns about global demand continued. Gas was trading at $2.30 on Wednesday, 23% below the highest point in March and 76% below last year’s high.
The case for natural gas
Natural gas price has been under pressure because of the relatively lower demand in Europe. In Q4 of last year, the biggest concern among investors was that Europe would freeze to death because of minimal supplies from Russia. However, demand in the region dropped and countries were able to replace Russian gas with American LNG.
A key shift going on in the Western world is the ongoing transition to clean energy like wind and solar. Countries like Germany are also retiring their nuclear power sources. Another key shift is hydropower sources are struggling.
Last year, we saw Norway pause electricity exports to Europe as reservoirs dried up. The same situation happened in China, where the Yangtze River’s volume crashed. With the world getting warmer, many hydropower stations will struggle.
At the same time, governments are insisting on a transition to electric vehicles, which will lead to more need for electricity. The answer to this will be natural gas – and coal. Natural gas emits about 50% less of carbon than coal and the industry is working to limit methane emissions.
Most importantly, natural gas is easier to use and transport in the US, which has over 3 million of gas in the US. While nuclear would be the best option, the years of building them are highly prohibitive. The country’s newest nuclear plant took over 43 years to build.
Meanwhile, investments in natural gas and other fossil fuels not growing as fast as companies focus on ESG. And demand from Europe will remain high even if the war in Ukraine ends since the bloc will avoid being reliant on Russia.
Future of natural gas prices
Governments are pegging their clean transition hopes to wind and solar. However, the reality is that these two solutions will never match the efficiency of fossil fuels. For one, if the current growth continues, solar and wind will grow to 1,700 billion kWh in the next 22 years. That will leave a shortfall of about 570 kWh.
The problem with solar and wind is that sun does not shine all the time. The same is true with wind. As such, countries will always need fossil fuels in the long term, which will have a positive impact on natural gas prices.
Therefore, while the natural gas price has dropped in the past few months, in the long term, this will likely change because of higher demand and low supplies
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