By Nathalie Voit

According to the Energy Information Administration’s (EIA) Short-Term Energy Outlook (STEO), energy prices are expected to remain volatile this winter due to supply uncertainty and changing consumer demand.

U.S. natural gas futures on Nov. 12 declined over 6.5% to $4.795 per million British thermal units (MMBtu) on the New York Mercantile Exchange (NYMEX), nearing the previous session’s seven-week low of $4.91/MMBtu on Nov. 9, three days earlier. According to EIA data, first-day of the month prices in November were significantly higher, at $5.49/MMBtu. First day of the month prices in September were closer to today’s levels, at $4.33/MMBtu.

U.S. natural gas prices have remained significantly volatile in the latter half of 2021. In the first week of October, Henry Hub natural gas spot prices were as high as $6.37, reaching a 12-year peak on Oct. 6. The monthly average daily spot price settled at a record $5.51, “up from the September average of $5.16/MMBtu and up from an average of $3.25/MMBtu in the first half of 2021,” November’s STEO states. 

Despite the high prices, natural gas demand for electric power generation remains high. In tandem with strong global demand for U.S. liquefied natural gas (LNG), these factors have “limited downward natural gas price pressures.” 

In addition to robust domestic and international demand, higher natural gas prices in the latter half of the year also reflect sub-optimal natural gas stockpiles. 

According to the EIA, working natural gas inventories in the lower 48 states sit 3% below five-year averages as of Nov. 5. The inventory forecast for the end of March 2022 is expected to total 1,486 billion cubic feet (Bcf), 12% below the previous five-year standard. Still, storage levels are 4% higher than in mid-September following eight consecutive weeks of “relatively large net injections.”

Although natural gas inventories are predicted to decline this winter to near their five-year average draws, winter temperatures and domestic supply conditions will determine the extent of consumers’ natural gas demand. The most significant determiner of demand and prices will be winter temperatures, the EIA said. 

“Because of uncertainty around seasonal demand, we expect natural gas prices to remain volatile over the coming months with winter temperatures to be a key driver of demand and prices,” the report reads. 

The EIA’s Henry Hub spot price forecast will average $5.53 from November through February, and then gradually decline through 2022, “averaging $3.93 for the year amid rising U.S. natural gas production and slowing growth in U.S. LNG exports.”

In addition, domestic production levels will also influence the forecast for natural gas. Production for dry natural gas is expected to increase during the rest of the winter (November-March), which will determine inventory levels and costs.   

Higher natural gas costs are also expected to drive demand for other sources of electricity. The forecast share of electricity generation from coal is expected to rise from 20% in 2020 to around 23% in 2021 and 22% in 2022. The EIA also predicted higher demand for renewables like solar and wind, which are expected to rise to 22% in 2022 from 20% this year. 

In addition to higher demand for alternative sources of energy, crude oil prices are expected to increase. The Brent crude benchmark averaged $84 per barrel (b) in October, up from $75/b in September and $43/b in October 2020. Although crude oil prices are notoriously volatile, the average 2021 annual price of Brent crude oil was $25 higher than last year’s annual average, at $67.71/b. Brent prices in October were the highest in seven years.

The Brent benchmark is an indicator of future gasoline prices, which on Nov. 12 hit an annual national average of $3.416 per gallon according to the AAA index. Like Brent prices, U.S. regular gasoline retail prices last month hit their highest monthly average since September 2014. Retail gasoline prices one year ago averaged $2.096, according to EIA data, or $1.05 less.

The EIA expects Brent prices to decline from their current levels to an annual average of $72/b following renewed production by OPEC+, U.S. tight oil, and other non-OPEC countries.

“We have finally seen a little dip in domestic demand for gasoline, which may signal that the seasonal post-Labor Day easing was a little delayed this year,” said Andrew Gross, AAA spokesperson.

“And if the recent steady increase in crude oil prices takes a breather too, consumers may benefit at the pump with smaller price hikes.”