Why are natural gas prices on the rise?

Updated on April 21, 2022

Natural gas prices in the United States have been on the rise. Observers of the market may wonder what this means for future natural gas pricing trends, potential costs to consumers, and economic competitiveness.

While AGA does not issue market forecasts, AGA's Energy Analysis team routinely examines factors shaping the domestic natural gas market, including supply and demand fundamentals.

The following analysis examines some of the fundamental factors shaping the natural gas market today.

What's happening with natural gas prices today?

On April 18, natural gas prices in the United States rose to their highest level since 2008. Contracts for next-month delivery of natural gas briefly reached $8.03 per MMBtu before settling at $7.80. The following day, prices dropped to around $7.00. Across the month, April has seen prompt-month futures being consistently traded above $6.00, a 140 percent increase since April 2021.

In contrast, European and Asian markets have experienced prompt-month natural gas contracts regularly trading well above $30 per MMBtu, including $70 contracts following Russia's invasion of Ukraine.

Indeed, natural gas prices today are higher than in recent years, but U.S. natural gas prices remain relatively low and stable compared with a larger span of history.

Within a larger span of history, prices remain low and stable

The market does indicate some easing of prices after next winter. Natural gas futures are priced above $7.00 per MMBtu for contracts through February 2023 (as of April 20). After that, the price for contracted gas begins to fall. Contracts starting in April 2023 are trading below $5.00 as of April 20. In other words, the market is showing an easing of pricing headed into the summer of next year.

Natural gas futures prices begin to decline by end of next winter

What are the drivers of current natural gas pricing?

The market may be reacting to a confluence of circumstances. This winter, natural gas demand outpaced supply growth, even though natural gas production ended 2021 at record levels. Additionally, underground storage inventories are lower than average, and liquefied natural gas exports remain at historic levels.

Average natural gas demand has increased by 3.9 billion cubic feet per day between November 1, 2021 and April 18, 2022. Increased gas use has been driven by liquefied natural gas feedgas (1.7 Bcf/d), higher power burn (+1.4 Bcf/d), industrial demand (+0.4 Bcf/d), and stronger residential and commercial use (+0.3 Bcf/d).

By comparison, production continues to increase but at a slower pace than demand. Indeed, natural gas production reached a record high in 2021; across the winter season, from November 1 until April 18, average supplies, including production and Canadian imports, increased by 3.6 Bcf per day. 

Demand has outpaced supplies this winter.

The difference between supply and demand has led to a net draw on storage inventories. As a result, inventories are lower relative to history, and the higher market pricing signals a need for additional supplies to rebuild stocks. Currently, U.S. underground natural gas inventories sit at 1.4 Tcf, 24 percent below year-ago levels and 18 percent below the five-year average.

U.S. storage inventories ended March at 1.4 Tcf.

In April, a late-season cold-snap boosted demand above already elevated levels. Average U.S. natural gas demand month-to-date is 4.3 Bcf per day higher than April 2021, and only ten percent of that increase is due to exports. The remaining ninety percent can be attributed to higher domestic end-use consumption, including residential and commercial heating loads and higher gas flows to power generation.

The near-term increase in LNG exports builds upon a longer-term trend of demand growth that has taken place across several economic sectors. Domestic natural gas demand has increased for electric power generation, industrial consumption, residential and commercial end-uses, and pipeline exports to Mexico. The key is that U.S. natural gas demand growth has been met by a robust supply position coupled with a growing and accessible delivery infrastructure.

U.S. natural gas demand continues to grow in 2021

What is the look ahead?

Higher natural gas market pricing will affect future gas supply growth. But how much?

The number of gas rigs in operation continues to grow and is up 50 percent year over year. Historically there has been a lag between price rise and the number of rigs in operation, so a significant change in the rig count in response to current prices may take some time to materialize. However, the current rig recovery pace has been slower than in recent history. The slower return of rigs may be due to several factors, including investor and producer restraints or adherence to originally planned production rates, disruptions or bottlenecks in material or labor supply chains, and challenges to building gas takeaway or delivery infrastructure.

During the past year as natural gas prices recovered, the resumption of gas drilling activity was muted but has picked up.

Nevertheless, the U.S. is on course to set new natural gas production records in 2022. S&P Global Platts forecasts that average U.S. production is set to increase by 4 Bcf per day throughout 2022. Production growth reflects the rise in gas drilling rigs in operation, the associated gas production from oil, and contributions from previously drilled but uncompleted wells. Total flowing gas volumes could reach above 97 Bcf per day by December 2022.

U.S. natural gas production is expected to grow

U.S. natural gas demand is set to remain strong as well. LNG exports are likely to be a key driver of demand in 2022, accounting for most of the forecasted annual increase in S&P Global's demand outlook. However, the second-largest component in residential and commercial end-users, driven in part by seasonal cold early in 2022.

LNG exports and domestic end uses contribute to higher demand

In recent years, U.S. LNG export capacity has increased significantly, but the pace of additions into 2023 and 2024 will slow. The export facility at Sabine Pass added a sixth liquefaction train with 0.8 Bcf per day of capacity, with the unit announced as "substantially completed" as of February 2022. A new export facility at Calcasieu Pass will come fully online in 2022 this year with a full capacity of 1.6 Bcf per day. After that, however, the next addition to US LNG liquefaction and export capacity, Golden Pass LNG, is not scheduled to come online until 2024. 

LNG imports are leading the growth in exports.

A key consideration as we monitor the market is whether additional production will be able to keep pace with the myriad demand drivers.

Even as supply grows using currently accessible gas, the picture for additional future supply growth remains strong. The most recent assessment of the U.S. estimated natural gas resource shows significant volumes of potential supplies. Technically recoverable resources, those in the ground but not yet recovered, total 3,368 trillion cubic feet (Tcf). When you add in the recovered gas, the total gas (resources plus reserves) rises to a record 3,863 Tcf, up slightly from the comparable year-end 2018 assessment.

Potential future supply of natural gas is at a record high.

Of course, politics or factors other than accessibility could constrain future production, creating inabilities to build new infrastructure or develop supplies. Difficulties in building new natural gas pipelines could lead to regional constraints in supply and demand.

In 2021, natural gas interstate pipeline capacity additions decreased to the lowest level since 2016. Of those additions, more than two-thirds of new interstate pipeline capacity was built within Texas or Gulf Coast markets. In contrast, areas like the U.S. northeast have made it increasingly difficult to site, permit, and construct new natural gas pipelines and other infrastructure.

Natural gas interstate pipeline capacity additions decrease in 2021.

Finally, inflation in coal prices has been increasingly shaping gas market pricing. Higher coal prices mean that higher gas prices may be needed to induce gas-to-coal switching for electricity, a key "outlet" for the market to ease demand. According to S&P Global Commodity Insights, given current coal prices, the implied or "breakeven" price for natural gas to induce switching to coal could be as high as $7 to $8 per MMBtu depending on the type of coal, price, and the location at which it is used.

A healthy market

Like most commodities, natural gas prices are subject to supply and demand forces. Moreover, prices are a signal to the market to bring new supplies online.

Production has continued to grow steadily since the pandemic and reached record-setting levels in 2021. Current forecasts show that natural gas will continue to be accessible and that production is likely to continue to grow in 2022 and beyond.

Demand drivers are much harder to predict because they are subject to weather patterns and market forces, but LNG exports are expected to grow only modestly beyond current levels through 2024. As a result, prices are likely to be driven primarily by domestic demand. Will we have a sweltering or mild summer? How much additional gas will be needed to generate electricity this summer? How quickly will the U.S. be able to refill its storage inventories before the winter heating season?

This summer, we will continue to monitor those economic fundamentals that shape natural gas prices. Still, despite the recent hike in prices, the market for natural gas remains well-positioned to deliver energy to all customers at affordable prices.


For questions about this analysis, please contact:

Juan Alvarado, Director Energy Analysis, jalvarado@aga.org
Richard Meyer, Vice President Energy Markets Analysis and Standards, rmeyer@aga.org


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