When El Niño Fades, 'This' Price Will Rise [Weekend Money]

Despite entering the seasonal peak demand period, U.S. natural gas prices remain weak. However, there is an outlook that a clear price rebound will begin next year as the effects of El Niño subside by the end of this year.

According to Daishin Securities, U.S. natural gas futures prices (Henry Hub) remain sluggish even though the contract has rolled over to October delivery, which reflects heating demand. The reason is the El Niño phenomenon. El Niño, resulting from weakened trade winds, prevents the southward movement of Arctic cold waves, making winter temperatures higher than usual. In other words, the current market price already reflects a pessimistic outlook for lower heating demand this winter.

However, it is expected that this price discount factor will disappear after the end of this year. According to Columbia University's International Research Institute for Climate and Society (CCSR/IRI), sea surface temperatures in the eastern Pacific are projected to peak between October this year and January next year, then gradually subside. Jin-Young Choi, a researcher at Daishin Securities, explained, "This suggests that El Niño will shift to a neutral state by next summer," and added, "Considering that natural gas price growth is inversely correlated with eastern Pacific sea surface temperatures, the hurdles to price increases next year will be removed."

Daishin Securities pointed to possible disruptions in European electricity supply and demand as the biggest variable for next year's natural gas market. Currently, Europe is experiencing a record heatwave that has caused the Rhine River to drop to its lowest level in a decade, stagnating coal transport, and causing hydropower output to plunge to its lowest since 2015. Nuclear power generation is also facing difficulties, as rising river water temperatures and shortages of cooling water have forced some nuclear plants in France to reduce output. This is why European LNG prices react far more sensitively than U.S. Henry Hub prices.

Choi commented, "The issue is next year, when El Niño recedes," and analyzed, "If El Niño shifts to neutral, precipitation will sharply decrease across Western and Central Europe. Given that most of Europe’s nuclear plants are located in Western Europe, the region’s electricity supply and demand next year is likely to be even tighter than now."

Previously, during the period from May to August 2020 when El Niño shifted to neutral, electricity demand in Europe migrated to natural gas, triggering a super cycle.

Choi stated, "While not immediate, we maintain an optimistic view on next year's natural gas prices," and advised, "Active strategies using energy are recommended."

This content was produced with the assistance of AI translation services.