Natural-gas prices have plunged in the past month, as storage levels in the U.S. and Europe have improved and fall weather has been milder than usual, meaning people are using less of the fuel to heat their homes. That is good news for consumers, though there's a chance that prices will tick higher again as colder weather sets in.
The drop in European prices is particularly good news, given that Moscow has turned off almost all supplies of natural gas to the continent amid an economic war sparked by Russia's invasion of Ukraine. On Monday, the benchmark price of European natural gas, the Dutch TTF futures contract, closed below €100, which is roughly equivalent to $100, per megawatt hour for the first time since June. In August, just before Russia stopped supplying natural gas through a key pipeline to Germany, it had briefly jumped over €300.
Europe's rush to fill storage tanks ahead of the winter has paid off, with storage levels now exceeding 92%, ahead of the continent's targets.
In the U.S., the benchmark Henry Hub contract fell as low as $4.75 per million British Thermal Units in intraday trading on Monday, its lowest level since March, after peaking at a settlement price of $9.68 in August. The price of gas is well below levels in Europe, but it is still high compared with prior years, meaning consumers will be paying more for natural gas heat than in the past. Electricity prices throughout the country are rising because natural gas generates more power than any other source in the U.S.
Although the situation is much less dire than it was toward the end of the summer, it is worth looking at longer-dated futures to see where the market expects gas to trade as winter sets in. In Europe, futures expiring in February are trading at €146, nearly 50% higher than those expiring next month.
In the U.S., futures expiring in February trade at $6, indicating that traders are also betting the recent slump won't last. U.S. supplies of natural gas are about 5% below the longer-term average.
But in some places, including the Northeast, the storage deficit is worse. A lack of natural-gas pipelines to New England means consumers there rely on liquefied natural gas (LNG) shipped from overseas, where demand is particularly high this year. The Federal Energy Regulatory Commission said in a report last week that New England could see higher price spikes than other regions.
"In New England, high global LNG prices are contributing to higher winter natural gas futures prices, as the New England regional natural gas market relies on imported LNG in the winter to meet natural gas demand and must compete for LNG volumes with Europe and Asia," the report said.
Next year, some analysts expect a recession to curb gas demand and cause prices to fall. Bank of America analyst Francisco Blanch has a target of $4.50 for U.S. gas in 2023 because he expects demand to grow at just one-third the pace of 2022.
Stocks of natural-gas producers have mostly weathered the recent drop in prices. Natural gas is still about twice as expensive as it has been for the past decade, so these companies are still earning profits well above historical levels. And they often trade based on longer-dated futures more than near-term prices. Coterra (CTRA), Southwestern (SWN) and Chesapeake Energy (CHK) are all trading above their levels from a month ago, and EQT (EQT) is down just 2.8%, much less than the drop in natural-gas prices.
Several of the natural-gas producers will be reporting earnings in the coming days. Investors will be listening closely to their plans for 2023, and whether they plan to hedge their production aggressively or try to take advantage of spot pricing.
There's one early indication that the companies are still optimistic. Range Resources (RRC) tripled its stock-buyback authorization after reporting earnings late on Monday.