Winter, War, and Natural Gas

How the World has contributed to natural gas price trends

By Darryl Weng

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Global conflicts continue to place heavy stress on the World’s economy, upending the recovery of commodity prices. The introduction of the Israeli-Hamas conflict on top of the years-long war between Ukraine and Russia pushes investors’ incentives to gain even more footing in the commodity market.

Out of all the commodities, natural gas appears to have the largest complications in its supply and demand in the coming months. By itself, disregarding any geopolitical mishaps, the natural gas industry is cyclical concerning seasonal change. During the spring and fall seasons, the price of natural gas dips. Likewise, summer and winter are when prices begin to climb - especially winter. Now, as the winter 2023-2024 season begins, natural gas prices are expected to fluctuate even more aggressively than if it were a normal seasonal change.

There are two primary categories responsible for such fluctuations: 1. Geopolitics 2. Climate Change. The first category involves the Russian-Ukraine War, the Israeli-Hamas conflict, and America’s role in the global energy trade. The spark of the war between Russia and Ukraine cut and destroyed the natural gas supply line from Russia to Europe. Most members of the EU were initially heavily reliant on Russian natural gas imports, but, in a collective effort to oppose Russia, completely ended reliance on Russian supplies. The consequences of spiking global natural gas prices took effect immediately, and the Organization of the Petroleum Exporting Countries (OPEC) decided to limit the production of oil, natural gas, and other energy exports. As a result, with a sudden rise in demand, the rising prices began trickling into every corner of the world. As the world tried to recover from the pandemic, the Russian-Ukraine War contributed to the inflation rates and prevented any hopes of easing in gas prices.

Data trends in the past decade regarding America’s natural gas imports and exports also display the sudden change in natural gas economics. According to the U.S Energy Information Administration (EIA), the United States became a “net exporter of natural gas” in 2017. But just as COVID-19 turned global in 2020, along with natural gas production in the U.S. rising to new heights, the volume of imports dramatically increased as well. Such a dramatic increase highlights the stressors on not only the global economy but also the high demand for natural gas. Despite the stellar natural gas production levels in the U.S. since 2020, the demand for natural gas required increased foreign production on top of American natural gas. The new Israeli-Hamas conflict has also contributed to the trend, causing war-time commodity prices in the Middle East. Understanding that OPEC is most concentrated in the Middle East and responsible for most of the natural gas production globally, the surge in oil and gas demand from both parties in the Israeli-Hamas conflict affecting OPEC’s operations will further disrupt natural gas prices in peak seasons. In this coming winter season, the price trend since 2020 is expected to continue, if not sharply increase.

Although the second category of climate change has not been mentioned, its effects on the price trend will not be noticeable due to the high concentration of global conflicts. During the 2022-2023 winter season, climate change did ease prices and protect formerly Russian energy-reliant countries such as Germany from further economic burden. However, if a warm winter were to occur once again, the additional shock from the Israeli-Hamas conflict would cause renewed short-term interest from investors. As shown through historical data, the introduction of the Russian-Ukraine War caused investors to immediately flood in and occupy the commodity market. As the war continued, many investors maintained the belief that natural gas prices would hike during peak seasons and were somewhat validated by the rise in prices. For an unknown reason open to speculation, some investors pulled out, resulting in less-than-expected earnings in the market for that winter season. But, just as the Israeli-Hamas conflict has begun, winter is approaching closely. In other words, this winter season is within short-term interest for investors and speculators looking at natural gas prices in the face of a new international conflict.

Should the assessment of the current price trend be open to error, the optimal solution is to explore risk-seeking options. When prices are extremely likely to increase regardless of events, it is advisable to switch to options maximizing return on investments (ROI). The author’s recommendation is a leveraged ETF tracking natural gas prices.