Electric and natural gas prices should probably be somewhat lower than they are right now, but higher oil prices are keeping them not only propped up but climbing. Natural gas NYMEX this morning is over $5.00/MMBTU. Even with the strong supply and demand balance of natural gas domestically and globally, natural gas prices fundamentally should be around $4.25/MMBTU. Because electric prices mostly parallel natural gas prices, electric prices are at historical levels as well. It’s been many years since natural gas & electric pricing, has been pulled along by oil prices like this. However, these are uncertain times and natural gas has technically been aligned with oil prices, at least in the short-term.
European natural gas prices continue to explode, with the April Dutch TTF contract briefly reaching new record highs at $106/MMBtu overnight—up an incredible $41/MMBtu from Friday’s close and equivalent of $600/barrel of oil—before retreating nearly $30/MMBtu intraday. The wild price moves reinforce the nonlinear structure of the natural gas market. There is no incremental supply available in April directly as a result of higher prices (other than potentially scaring European leaders to avoid a ban on Russian energy imports) – and little to balance the market other than demand destruction. The latest price spikes come as the CEO of France’s Engie warned that any ban of Russian gas imports to Europe may require extreme government rationing to make it through winter 2022-23. In the interim, growing margin calls and counterparty risks present increasingly vital components of price action, while the political desire to protect consumers may lead to increasing government action to offset impacts of spiking energy costs.
While natural gas prices are 15-20 times cheaper in the United States, the domestic market has also edged on to the price-inelastic portion of the demand curve. As a result, the growing technical market correlation with oil can lift NYMEX natural gas prices with little impact to near-term supply/demand fundamentals. Despite the bearish seasonal bent fundamentally, with neutral near-term fundamentals, a bullish technical outlook, and significant further upside price risks for oil, the most-likely near-term trajectory for natural gas and electric may be higher.