When it comes to media attention, gas is oil’s “poor cousin”, as Martin Spring noted in his On Target newsletter. So all the fuss about the oil spike has obscured the fact that natural gas has risen even faster this year, with US futures up by 65% to $12.22m British thermal units. Chalk it up to a tight market and low storage levels, said Barclays Capital.
Natural gas: behind the rise
Demand from the power sector is the main impetus behind prices, said Chris Flood in the FT. The agriculture boom is providing an additional fillip as gas is increasingly being used in fertiliser and ethanol production. Meanwhile, domestic production has been hampered by a leaking hub in the Gulf of Mexico. And the global liquefied natural gas market is facing a “squeeze” as Japan is importing record amounts owing to problems with its nuclear power industry and demand for electricity in China and India is surging, so imports of gas have been running far below normal.
Natural gas: the global picture
Chinese and Indian consumption is expected to triple and double respectively over the next twelve years, said Spring, which helps explain why global demand for natural gas has been growing at 3% a year, compared to 1.7% for oil. At this rate it will overtake oil in importance by the middle of the century. It is the cleanest-burning fossil fuel and helps reduce dependence on coal and oil; it now accounts for a fifth of the world’s electricity generation. No wonder there’s now a “mad scramble to secure long-term supplies”.
While the overall long-term outlook is promising, the fundamentals of the American market provide scope for further price gains over the summer, especially if hot weather boosts demand for air conditioning and hurricanes damage production. Hedge funds unwinding losing positions – they have been betting against the market of late – could provide further uplift.