On Wednesday, U.S. natural gas futures remained steady around $3.95 per MMBtu, near the highest level in two years. Forecasts of colder weather in the coming week have increased demand and could lead to a new daily high. Despite lower warming demand this week and a reduction in gas outages, speculators continued to increase their long positions to the highest level since February 2022.
I predict that future storage reports will show significant withdrawals from stocks that will exceed the January 2022 record of more than 200 billion cubic feet of gas. These withdrawals could even eliminate the current storage surplus and bring stocks below the five-year average by the end of January.
Before the start of the conflicts in Ukraine, Russia was the main gas supplier for the European Union.
However, in response to the attack in the heart of Europe, Russia's market share has been drastically reduced and European nations have become less dependent on Russian gas. Moreover, with the closure of Nord Stream in 2022, most of the gas coming to Europe now travels through the Urengoy-Pomary-Uzhgorod pipeline.
Gas is transported from Russia to Italy via a pipeline that passes through Ukraine and Slovakia, and then splits into branches headed to the Czech Republic and Austria. This section of the pipeline also includes the Urengoy-Pomary-Uzhgorod section that reaches Italy.
As of January 1, 2025, things have changed.
Ukraine decided not to renew its contract with Gazprom and closed the taps to prevent Russian gas from flowing through the country. Ukrainian President Zelensky said, “We will not extend Russian gas transit, we will not allow them to make billions on our backs and the lives of our citizens.”
The pipeline closure in Ukraine must be solved with an effective solution.
Countries like Slovakia depend heavily on Russian gas supplies and must find reliable alternatives. One possible solution would be to transport Russian gas to Azerbaijan and then distribute it to Ukraine and other European countries through this country.
Despite a final agreement, Azerbaijan should be allowed to transport its gas through Ukraine. However, Zelensky opposes this and said, “We are not playing this game. If there is another country that receives Russian gas and then sends it through pipelines to Europe, it would be as if they continue to benefit from this war and transfer money to Russia.”
The issue of gas supply and payments to Russia is complex. If a European country decides not to make payments until the war is over, then it could be a solution for both sides. However, it remains an issue to be explored and resolved.
Europe is heavily dependent on gas supplies, and one solution could be increased imports of U.S. gas. This perspective makes me optimistic about rising gas prices shortly.
My study of the futures curve is showing positive signs at the moment, as the curve is in a contango situation. This means that future prices are higher than the current spot price, which is a good sign for the medium term. As we get closer to contract expiration, the differential between the spot and future prices decreases, and the curve will tend to move back toward the spot price.
Based on my analysis, I predict that in the third quarter of 2025, during the summer, natural gas prices could average 5. This will be influenced by rising temperatures and low inventories. To maximize the outcome, it is important to choose the right investment instrument. One can invest in stocks of gas producers, in an ETF, or directly in gas futures.