Will the Natural Gas Squeeze Derail the Recovery?
Energy is expected to increase in price as 2021 closes and 2022 begins, according to the Oct. 13, 2021 Short-Term Energy Outlook (STEO) from the U.S. Energy Information Administration (EIA).
Between October 2021 and March 2022, the U.S. benchmark, Henry Hub, is expected to average $5.67 million British thermal units (MMBtu). For 2022, the average price is expected to be $4.01/MMBtu. This is attributed to increased consumer need, a decline in domestic natural gas production, and sub-par inventories stockpiled as the weather becomes increasingly cold.
According to the EIA, the price of natural gas is influenced by a multitude of factors. These include supply and demand, production, storage levels, imports and exports, seasonality, the state of the economy and the availability of other fossil fuels.
For example, looking at hurricanes and seasonality in 2001, 25 percent of “dry natural gas” was produced in the Gulf of Mexico; however, only 2 percent was produced there in 2020. Cold weather also can impact prices due to slowing production – and if it’s coupled with increased demand, it can similarly increase natural gas prices.
Power generation creates additional need for air conditioning and power. With natural gas used for power generation, and if there’s increased demand coupled with limited inventories, trading on the cash market could see significantly higher prices than normal.
The Federal Reserve Bank of San Francisco (FRBSF) saw how higher prices of natural gas impacted individuals and businesses in its Federal District. The agricultural sector used it for greenhouse temperature control, using mechanical equipment to prepare crops for the market. It led to some farmers halting their operations due to unprofitability.
Consumers in the nation’s West use natural gas as their chief source for warming homes. During 1999 and 2000, the FRBSF explained that it wasn’t uncommon for the price to increase by 60 percent or even double.
Considerations for the Stock Market
With the price of natural gas projected to increase as the weather gets colder, it’ll impact businesses and consumers. Businesses will be forced to determine how much of their additional costs to absorb, impacting profit margins, and how much to pass on to consumers. For consumers, there are two considerations – they will be impacted by increases in prices of goods and services, and the likelihood of decreased consumer spending and confidence, both impacting the economy.
It’s important to understand how consumer confidence impacts spending and therefore is a good indicator of how publicly traded companies will perform on their quarterly earnings. According to the Organization for Economic Co-operation and Development (OECD), consumer confidence gives a good idea of how they’ll spend and save determined by a survey of their budget and their outlook on the overall economy. The higher the consumer’s confidence, the more likely they are to spend and save less.
With production low and supply availability uncertain globally, depending on how hard consumers are hit in the wallet, price fluctuations of natural gas will impact consumers accordingly – and in-turn, that of company earnings.