We no longer support this browser. Using a supported browser will provide a better experience.

Please update your browser.

Close browser message

November 22, 2021

Supply and demand for gas tends to be heavily influenced by seasonal changes, with demand usually outpacing supply as temperatures drop for winter. This year, global gas prices have hit record highs well ahead of winter. Natural gas is bought and sold by the cubic foot and in the U.S. alone, natural gas demand can surge by 50-70 billion cubic feet (bcf), if not more in a typical week in winter. The current situation is so stressed, that finding even 1 bcf of additional supply is becoming increasing difficult. For Europe, the situation is looking especially bleak, potentially exacerbated by Russian’s plans to limit additional gas exports to the bloc. A colder-than-normal winter in Europe, Asia, Russia or even the U.S. could push the global gas market past the uncharted territory it is already in.

How Did the Natural Gas Market Get So Stressed?

The price of natural gas is six times higher than last year and about four times higher than this past spring. A sharp increase in demand globally, as countries have restarted their economies and come out of lockdown, along with low inventories, has caused prices to sky-rocket. The situation is especially critical for Europe, the swing or balancing market for global gas, meaning the amount of liquefied natural gas (LNG) the region imports after other nations have taken what they need. A whole range of risk factors have set the stage for the unprecedented price rally seen this year:

  1. Northwest Europe exited the past winter withdrawal period - where gas in storage is transported and delivered - significantly below the five-year average. With the traditional end of the withdrawal season at the end of March, an extension of winter weather into April 2021 hit storage unexpectedly. Ultimately, this attracted market attention, particularly from the investor space.  
  2. Russia reduced its supply through Ukraine into Europe. State-backed Russian energy corporation Gazprom filled in the gap left by this reduced flow, drawing down its European storage significantly. Gazprom also spent much of the year meeting increased export-related demand to China and Turkey and attempting to hit its targeted 73 billion cubic meters (bcm) domestic storage level by mid-October.
  3. In the global LNG market, increased unplanned maintenance reduced global LNG supply. Reduction in LNG supply from Trinidad and Tobago, Australia and even Norway contributed to this reduction in supply. 
  4. Finally, summer weather plagued the European natural gas balance in more than one way. Incredibly hot July weather in South Korea and significant droughts in Asia and South America increased thermal power generation demand. To put context around some of those demand events, S&P Global Platts reported that power generation demand in South Korea was estimated at 103 million cubic meters (mcm) per day in July, a level not seen for a single month in that country in the past decade. The lack of wind power generation in Germany and the U.K. also pushed Europe to rely on hydrocarbons even further.

Are Natural Gas Prices Forecast to Rise From Here?

In Europe, natural gas is caught between a few significant risk factors that could determine its fate this winter: Asia’s willingness to continue to bid on LNG cargoes, Russia’s ability and willingness to increase deliveries of natural gas to Europe this winter and finally, the most important risk factor of all, the weather.

“Without additional Russian volumes, the winter weather premium currently embedded in the European natural gas price cannot significantly diminish until the outlook for January weather becomes more certain,” said Shikha Chaturvedi, Head of Global Natural Gas and Natural Gas Liquids Strategy at J.P. Morgan. 

Cold weather in Europe, Asia, Russia or even the U.S. could add further strain to the already stretched market. A colder-than-expected winter in even one of these regions could create a further imbalance in the global gas market. 

“Watch Russia’s weather. This is an important risk factor to highlight because watching winter weather in key producing regions (such as Russia and the U.S.) will be an important driver in price formation for the global gas market. Russia has already warned that it will prioritize its domestic needs over exports and the U.S. could potentially attempt to price higher to close the wide-open LNG export arbitrage should its balance tighten further,” added Chaturvedi. 

“Nord Stream 2 is heavily entangled in much of the Russian rhetoric regarding assisting Europe this winter. Ultimately, we found that much of the help that Russia is willing to give seems to be directly tied to the approval of the Nord Stream 2 pipeline. While Nord Stream 2 is currently awaiting regulatory approvals to begin flowing, estimated time frames for those regulatory approvals span as far as the second half of 2022. We have currently embedded the start of Nord Stream 2 in December for a base case, but we are quite certain there is significant risk to this assumption,” said Chaturvedi. 

“As a result of increased tightness in the balance, we have raised our fourth quarter (Q4) 2021 and Q1 2022 price forecast of contracts of the Dutch TTF hub — a European benchmark for natural gas, to 80 euro/MWh and 75 euro/MWh, respectively. However, we are the first to admit that this price increase only reflects further tightness, keeping in mind it is difficult to determine how high price will have to rise in order to see a corrective measure in the supply and demand balance,” added Chaturvedi.  

In the U.S., with the storage balance on a knife’s edge and sticky production prints, a cold start to winter is likely enough to set U.S. prices on a steep trajectory higher.

J.P. Morgan has also revised its U.S. natural gas 2022 price forecasts to $4.81/ Metric Million British Thermal Unit (MMBtu), the unit traditionally used to measure heat content or energy value in the natural gas market. Estimates for Q4 2021 have also been revised to $5.50/MMBtu.

Watch Russia’s weather. This is an important risk factor to highlight because watching winter weather in key producing regions, such as Russia and the U.S., will be an important driver in price formation for the global gas market.

Shikha Chaturvedi, Head of Global Natural Gas and Natural Gas Liquids Strategy, J.P. Morgan

What is the Outlook for Oil Prices?

Oil prices have climbed as much as 19% since the start of September, encouraged by a shortage of natural gas that has increased demand for other energy sources. 

Record coal and gas prices are prompting the power sector and energy-intensive industries to turn to oil, potentially boosting demand by as much as 750 kbd (thousand barrels per day) during winter and drawing oil inventory by 2.1 mbd (million barrels per day) over November and December.

Aside from soaring natural gas prices, the largest oil storage hub in Cushing, Oklahoma is also in focus, as stockpiles of U.S. crude there are falling close to operational lows. 

“If nothing were to change in the Cushing balance over the next two months, we might expect front WTI spreads to spike to record highs - a ‘super backwardation’ scenario. Though the dynamics of the U.S. crude balance are different than they were in 2018 and much different than they were in 2014 - the last two times Cushing drew down toward operational limits - the market still has a few levers to pull before we worry about such a scenario,” said Natasha Kaneva, Head of Global Commodities Strategy at J.P. Morgan. 

J.P. Morgan Brent crude oil forecasts are currently at $83 per barrel (bbl) for Q4 this year, before falling to $78 for Q1 2022 and $80 and $75 respectively for WTI. 

“A colder-than-normal winter in a combination of main gas consuming regions could potentially boost gas-to-oil switching demand to 925 kbd - likely close to the probable upper limit of how much demand oil can gain from gas, thus ‘fundamentally’ capping Brent oil at around $90 bbl. A cold and extreme winter throughout the northern hemisphere, however, could theoretically necessitate the switch of the full 2 mbd of gas-to-oil switching capacity for a period of time, pushing prices even higher,” added Kaneva. 

If nothing were to change in the Cushing balance over the next two months, we might expect front WTI spreads to spike to record highs - a ‘super backwardation’ scenario.

Natasha Kaneva, Head of Global Commodities Strategy, J.P. Morgan

Related Insights

Global Research

Global Research

J.P. Morgan’s Research team leverages cutting-edge technologies and innovative tools to bring clients industry-leading analysis and investment advice.

Mid-Year Outlook 2021

Mid-Year Outlook 2021

What does the economic future hold in a post-pandemic world? 

Why is Cybersecurity Important to ESG Frameworks?

Why is Cybersecurity Important to ESG Frameworks?

Cybersecurity is important to protect systems, networks, programs and data. But why is cyber protection now an important social concern too? Find out here.

This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.

This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan. Copyright 2021 JPMorgan Chase & Co. All rights reserved.

MSCI: The MSCI sourced information is the exclusive property of MSCI. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an ‘as is’ basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.