After a prolonged multiyear slump, U.S. natural gas prices rallied in the waning heat of late summer to their highest levels in more than seven years. The recovery has occurred largely counter-cyclically to historical seasonal patterns, with prices building momentum through the dog days of summer rather than during the typical winter heating–and to lesser extent, peak summer cooling–seasons when demand is most pronounced.

Henry Hub spot prices averaged more than $2 an MMBtu higher in the first full week of September than they had in the first full week of January ($4.93 versus $2.74 an MMBtu). Aside from five days in February during the anomalous “deep freeze” weather event, Sept. 10 was the first time since the tail end of winter 2013-14 that Henry Hub prices averaged higher than $5 on a daily basis. And it occurred on a day when the low temperature in Dallas was 76 degrees, as opposed to 2 degrees back in February.

While U.S. prices are expected to moderate somewhat before the heating season officially begins on Nov. 1, the post-Labor Day surprise in gas prices has led the U.S. Energy Information Administration to adjust its Henry Hub price forecast higher for the fourth quarter. EIA now projects that Henry Hub spot prices will average $4/MMBtu, in line with the August average of $4.07 and above the July average of $3.84.

The agency had forecast Henry Hub to average $3.71 in the third quarter, but actual prices have far exceeded that expectation. However, in its most recent Short-Term Energy Outlook, EIA says its models indicate prices will remain strong through early winter, but then weaken through 2022 as U.S. natural gas production increases in response to higher prices and liquefied natural gas exports slow from their current pace, keeping storage inventories adequate to meet demand.

“Forecast Henry Hub prices this winter reach a monthly average peak of $4.25 in January and generally decline through 2022, averaging $3.47 for the year,” the STEO states.

U.S. dry natural gas production is on track to average 92.7 Bcf/d for the second half of 2021, up 1 Bcf/d from the first half of the year. EIA sees production jumping to 95.4 Bcf/d in 2022 as stronger oil and natural gas prices encourage new drilling and completion activity, resulting in both new dry gas and new associated gas volumes in tight oil plays.

Lower-48 storage inventories on Sept. 10 stood at just above 3 Tcf, which was 16.5% below year-ago stock of 3.6 Tcf and 7.1% below the five-year average of 3.2 Tcf. “Injections into storage this summer have been below the previous five-year average, largely as a result of hot weather and high exports occurring amid relatively flat natural gas production,” EIA relates, adding that it projects that inventories will end the fall injection season on Oct. 31 at 3.6 Tcf, or 5% short of the five-year average.

The National Oceanic & Atmospheric Administration’s most recent long-range winter forecast calls for normal to slightly warmer-than-normal winter temperatures for the Midwest, East Coast and South regions as a result of La Niña conditions setting up later this autumn. As always, however, seasonal weather patterns will play a major role in determining price behavior as winter approaches.

With that in mind, lower storage inventories leave the market subject to greater volatility in the event of unexpected demand or extreme weather events. Last month, Goldman Sachs warned of “violent price upside” for U.S. natural gas this winter should temperatures turn out colder than average, according to published reports.

The upside for natural gas pricing is already readily apparent in markets in other parts of the globe, even without a particular weather-related catalyst driving prices higher. Referencing the “incredible bull run for global gas prices,” RBN Energy’s Lindsay Schneider explained that the upward price pressure is “underpinned by high demand for LNG and the cascading effect of a supply squeeze in Europe, brought on by the triple threat of low domestic production, decreased imports from Russia, and a scarcity of incremental LNG cargoes.”

Spiking European Prices

Across the Atlantic, European natural gas markets are experiencing a runup in natural gas prices that is increasingly causing concern for the upcoming winter. The October futures contract for Europe’s TTF regional gas benchmark closed Sept. 19 at levels five times higher than a year ago, sounding alarm bells in industries ranging from electric power generation to fertilizers and transportation. Global indices show ramping pricing pressures from Germany to the United Kingdom.

According to EBW Analytics Group, seven U.K. energy suppliers have already gone bankrupt this year amid spiking natural gas and electricity prices, and more are expected to fail in the weeks and months ahead. “Reports of crisis talks between energy companies and the government could lead to a multibillion dollar government rescue package to allow larger suppliers to absorb unprofitable customers from failing firms.” EBW said in a summary. “Other options to manage the unfolding crisis include reducing environmental fees or Ofgem, Great Britain’s energy regulator, stepping in to effectively nationalize failing companies short term.”

With European and Asian markets competing for LNG export cargoes, the situation in the European gas market is so tight that Goldman Sachs suggests that cold winter weather across Europe and Asia could boost demand for oil, driving a $5/bbl upside premium risk to its fourth quarter 2021 Brent price forecast of $80/bbl.

In a note to clients, Goldman Sachs projected that an additional 1.3 million bbl/d of oil could be used for power generation this upcoming winter. “Tightness in global gas supplies creates a clear and potentially meaningful bullish catalyst for the oil market this winter,” the note read. It added that low seasonal natural gas inventories across Europe are creating elevated risk that gas-to-coal switching and renewable energy generation will fail to head off supply shortages in European markets by the end of winter.

LNG exports are a critical source of supply to replenish drawn-down inventories in European and Asian market alike, and U.S. LNG exports have responded to the demand call with record cargo shipments. However, on Sept. 17, the Industrial Energy Consumers of America sent a letter to U.S. Energy Secretary Jennifer Granholm requesting that she “take immediate action under the Natural Gas Act to prevent a supply crisis and price spikes for consumers this winter by requiring LNG exporters to reduce export rates in order to allow U.S. inventories to reach the five-year average storage levels.”

EBW Analytics Group says the IECA’s request to limit LNG exports appears highly unlikely to gain traction at present, particularly considering that any LNG export reductions would further increase the risk of dangerous shortages in European and Asian countries, including those closely allied to the United States.