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Natural gas will become significantly more expensive

The days of cheap natural gas may finally be over. U.S. natural gas futures jumped to a 31-month peak of 4.16/MMBtu. U.S. liquefied natural gas (LNG) prices are forecast to remain high

U.S. liquefied natural gas (LNG) exports will remain at record levels thanks to forecasts for warmer weather and rising global gas prices.

Refinitiv has forecast that average gas demand, including exports, will increase from 90.9 to 94.5 bcm per day as cooling demand continues to grow.

Some power producers will be forced to burn coal instead due to rising natural gas prices.

However, this will not be enough to stop the advance of natural gas.

Short-term outlook: Supply shortages

According to a report in the Financial Times, natural gas prices in Europe and Asia have soared due to tighter supplies, lower production in Europe, and fewer exports from Russia.

Natural gas prices in Europe subsequently climbed to a new all-time high of around €40 per MWh (~14/MMBtu). Gas prices in the UK even reached their highest level in 16 years. The situation is even worse in Asia, where gas prices have risen to $15/MMBtu.

Supply shortages are expected to worsen in the near future.

“It’s amazing that there hasn’t been more concern. In terms of additional supply, there are not many options on the table globally. Russia is really the only source of supply available, but we don’t know when additional supplies might start. So traders around the world, from Japan to Brazil, are starting to watch European prices as well,” said Tom Marzec-Manser of ICIS.

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Natural gas demand has surged around the world, due in part to economic recovery as economies reopen, but also to a series of extreme weather events. A long winter in Europe and droughts in countries such as Brazil have driven up natural gas consumption.

However, the short-term upward trend could come under pressure.

Long-term outlook: The natural gas bridge

The United States has long had a love affair with natural gas, as fossil fuel is the linchpin of the country’s electricity generation mix, while nearly half of American households use the fuel for heating. In many states, the transition from fossil fuels to renewables is well underway, and natural gas is serving as a bridge to make the transition smoother and less jarring.

In fact, natural gas and LNG are seen as a bridge in the transition to renewables because of their more favorable emissions profile, producing 30% less carbon dioxide than heating oil and 45% less than coal. And it is very likely that this will become a long-term trend.

While a combination of different short-term factors such as supply disruptions, the recovery of the global economy, and a pause in new LNG export facilities have driven the uptick in natural gas, there is a growing consensus that structural changes in the wake of the clean energy transition mean that this is likely to become the new norm.

Investment in new gas fields has declined in recent years due to demands from climate-conscious investors and governments. For example, high carbon prices in Europe are forcing utilities to rapidly switch to natural gas.

China is poised to rely on gas more than ever, while numerous governments in South and Southeast Asia are planning dozens of new gas-fired power plants to meet rapidly growing electricity demand.

Moreover, the switch to natural gas can be made relatively quickly and with limited capital investment. With few other viable options, the world will continue to rely more heavily on cleaner gas to meet near-term green goals.

“Regardless of how you look at it, gas will be the transition fuel in the coming decades as major economies commit to meeting carbon emissions targets. The price of gas is likely to remain high in the medium term and rise in the long term,” says Chris Weafer, CEO of Macro-Advisory Ltd.

Natural gas is the only fossil fuel expected to see significant growth in the current decade. According to the International Energy Agency, demand will increase by 7% by 2024 compared to pre-Covid-19 levels. Strong prospects for LNG demand are predicted by analysts at McKinsey & Co. Demand is expected to grow 3.4% per year through 2035.

Supply is likely to remain thin for some time, as investment is a scarce commodity. As a result, few new LNG export projects have been approved since the early 2020s, with the exception of a massive expansion in Qatar. Saudi Arabia, in the meantime, plans to explore the immense Jafurah gas field. Parts of the huge gas reserves in this area, however, will in all likelihood go into hydrogen projects.

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