Nat­ur­al gas prices have surged more than 35% in the past month, as wor­ries grow there is not enough gas stored up for the win­ter should tem­per­a­tures be espe­cial­ly cold in the north­ern hemisphere.

The usu­al­ly qui­et mar­ket for the com­mod­i­ty has become hot in the last cou­ple of weeks, as investors focus on the growth in demand around the world and sup­plies remain below nor­mal. The biggest prob­lem area is Europe, where sup­ply is at a record low for this time of year.

Even in the U.S., the amount of gas in stor­age is 7.6% below the five-year aver­age, accord­ing to recent data from the U.S. Ener­gy Infor­ma­tion Admin­is­tra­tion. Nat­ur­al gas is an impor­tant heat­ing fuel and is respon­si­ble for about 35% of pow­er gen­er­a­tion in the U.S., the fed­er­al agency found.

Peo­ple are start­ing to throw the ‘cri­sis’ word around” when it comes to Europe, said John Kil­duff, part­ner with Again Cap­i­tal. He said nat­ur­al gas in stor­age in Europe is 16% below the five-year aver­age, and the lev­el in stor­age is a record low for September.

Europe is square­ly behind the eight ball going into the win­ter sea­son. It’s going to put the focus on this com­mod­i­ty that’s been over­looked for the last sev­er­al years,” said Kilduff.

The tip­ping point could come in sev­er­al months when it becomes clear what type of win­ter is ahead for Europe, and also the U.S. Some ana­lysts say in an extreme sce­nario, U.S. prices could dou­ble if there is an extend­ed cold spell, par­tic­u­lar­ly in Europe where short­ages could get severe.

If the win­ter is mild­ly cold, it’s going to be prob­lem­at­ic for sure,” said Fran­cis­co Blanch, head of com­modi­ties and deriv­a­tives strat­e­gy at Bank of America.


Rising prices for natural gas


Natural gas futures for October jumped nearly 5.3% Monday, to about $5.20 per one million British thermal units, or mmBtus. Natural gas is up 106% year-to-date and is the highest in more than seven years. But the equivalent gas in Europe and Asian markets is upwards of $20 per mmBtus.

The U.S. is sup­posed to be an island, but in the last three or four years, there’s an increas­ing link between the U.S. and glob­al mar­ket,” Blanch said. “We’ve gone from 50% cor­re­la­tion to 95% cor­re­la­tion. The U.S. mar­ket is being dragged around by this.”

The U.S. has been export­ing nat­ur­al gas, in the form of liqui­fied nat­ur­al gas ship­ments. The ship­ments have grown to about 10% of U.S. pro­duc­tion, ana­lysts said. South Korea is the largest cus­tomer, fol­lowed by Chi­na and Japan, accord­ing to U.S. gov­ern­ment data. But buy­ers also include Brazil India, Poland, Spain, France and Portugal.

If it’s a cold win­ter, gas will not just be tight. It will be very tight,” said Daniel Yer­gin, vice chair­man of IHS Mark­it. If that’s the case, prices could go sharply high­er. “It will either be phys­i­cal short­ages, or it will be reflect­ed in price.”

Strate­gists say for now the world’s gas sup­ply is stretched, but prices could fall if the autumn and ear­ly win­ter are mild, and more gas is put in storage.

We lean toward a lot of risks for price spikes, rather than high­er and high­er sus­tained prices,” said Christo­pher Louney, com­modi­ties strate­gist at RBC.


Weather patterns and gas demand

Bri­an Lovern, chief mete­o­rol­o­gist at Bespoke Weath­er, said the U.S. is in a La Niña state, which could mean a warmer than nor­mal Octo­ber and Novem­ber in the north­ern U.S.

Few­er days that require heat­ing could mean more gas will go into inven­to­ries before the cold­est win­ter weather.

I think in a few weeks, the weath­er is going to give us some bear­ish head­winds [for nat­ur­al gas] as we get into the Octo­ber, Novem­ber peri­od. That does not mean we won’t see a cold­er win­ter,” he said.

Europe’s win­ter will depend on a weath­er pat­tern that sets up over Green­land. “The ear­ly indi­ca­tions do not indi­cate a big cold win­ter over there,” Lovern said.

The mar­ket is anx­ious about a repeat of last year, when a cold win­ter in Europe result­ed in a larg­er-than-nor­mal draw­down of gas.

Sup­plies were not built back up enough in Europe, and ana­lysts said late­ly Rus­sia had cut back on some exports into Europe. But the new Nord Stream 2 pipeline, bring­ing nat­ur­al gas from Rus­sia to Europe, could resolve some of the sup­ply prob­lems for the con­ti­nent in the next cou­ple of months.

Russia’s Gazprom last week announced com­ple­tion of the pipeline, which had once been opposed by the U.S. The pipeline would allow Rus­sia to dou­ble gas exports to Europe. Ger­many’s ener­gy reg­u­la­tor Mon­day said it has four months to com­plete cer­ti­fi­ca­tion of Nord Stream 2.


Global impact

The sit­u­a­tion in Europe has caught the atten­tion of U.S. offi­cials. Amos Hochstein, the U.S. State Department’s senior advi­sor for ener­gy secu­ri­ty, told reporters Fri­day that he was con­cerned about sup­ply, and poten­tial short­ages if the win­ter is very cold.

Hochstein said U.S. deliv­er­ies of liqui­fied nat­ur­al gas, known in the indus­try as LNG, can be increased and Rus­sia is com­ing off the peri­od of low supply.

There’s dif­fer­ent expla­na­tions for what’s going on, why Russ­ian sup­plies are con­strained,” said Yer­gin. “Russ­ian and Ger­man reg­u­la­tors are in a debate as to whether new reg­u­la­tions apply that were put in place after the pipeline was giv­en its final invest­ment decisions.”

Yer­gin said Asian demand has also been a fac­tor in the short sup­plies. Chi­nese liqui­fied nat­ur­al gas demand was 20% high­er than what was antic­i­pat­ed, he said.

TortoiseEcofin’s senior port­fo­lio man­ag­er Rob Thum­mel said Europe also did not get suf­fi­cient liqui­fied nat­ur­al gas car­goes to rebuild its inven­to­ries. “What hap­pened was Brazil hydro­elec­tric pow­er didn’t come to fruition,” he said.

There was drought, so Latin Amer­i­ca and Brazil need­ed nat­ur­al gas,” Thum­mel added. Dur­ing Europe’s sum­mer, “a lot of LNG… end­ed up in Brazil in particular.”

Sup­plies in Europe were not replen­ished, and there was a jump in demand. “Asia and Chi­na in par­tic­u­lar got ner­vous. They start­ed buy­ing LNG,” he said.

Thum­mel said he does not expect a seri­ous prob­lem for the U.S. this win­ter, and prices could come back down. He said there has been an increase in rig count in the Hay­nesville shale. “You’re like­ly to see high­er vol­umes,” he said.

One issue for the U.S. has been low­er vol­umes of shale oil pro­duc­tion. A byprod­uct of that pro­duc­tion is nat­ur­al gas.

I would say the volatil­i­ty in U.S. price will not be the same as it has been, and like­ly will be in Europe,” said Thum­mel. The amount of gas going into win­ter is about 8% below the five-year stor­age aver­age, but “it’s not the end of the world,” Thum­mel said.

As nat­ur­al gas prices have jumped, so have the stocks of gas pro­duc­ers, like the largest EQT Range Resources, and Antero Resources. Investors have also jumped into the Unit­ed States Nat­ur­al Fund ETF, which bets on the commodity.