The U.S. inflation rate in October flattened month/month and slowed from the lofty 2022 pace, impacted by lower natural gas prices and moderating energy costs overall.
The U.S. Department of Labor said Tuesday its Consumer Price Index (CPI) increased 3.2% from a year earlier, though that marked a substantial easing from the peak of 2022, when the inflation rate reached a 40-year high of 9.1%. The rate stood at 6.5% at the end of 2022, following several Federal Reserve interest rate hikes that sent borrowing costs higher, curbed spending and helped to drive down overall prices.
The surge in inflation last year was caused in part by the soaring natural gas prices in the wake of Russia’s invasion of Ukraine. Western sanctions against the Kremlin to oppose the war – and Russia’s retaliation – resulted in a massive curtailment of Russian natural gas sent to Europe via pipeline. This created a surge in demand for U.S. exports of LNG and, coming off a harsh winter in 2021-2022 that depleted American supplies, prices spiked. Oil prices also jumped and, by extension, gasoline costs reached multi-year highs.
In the summer of 2022, U.S. natural gas futures approached $10.00/MMBtu – reaching 14-year highs – and more than doubled the price level prior to the February onset of the Ukraine conflict. Brent crude prices topped $110/bbl in May 2022, up nearly 40% from the start of that year.
By early this year, however, the combination of mild weather and robust shipments of U.S. liquefied natural gas to help Europe replenish its stocks tamed natural gas prices. Robust U.S. production that hit a record around 105 Bcf/d and elevated domestic supply levels this year also tempered prices.
Futures have held below the $4 threshold most of this year. Oil prices also descended and now hover in the low $80s.
Natural gas cash markets were similarly impacted. For example, while NGI’s November Bidweek National Avg. rose 85.5 cents month/month to $3.135/MMBtu ahead of winter heating season, it remained well below the year-earlier average of $4.950.
The energy index component of the CPI fell 2.5% in October. That index dropped 4.5% over the past 12 months, the Labor Department reported. The natural gas subindex declined 16% in that span, and the fuel oil subindex fell 21%. The gasoline subindex decreased 5%.
In addition to moderated energy costs, high interest rates are expected to blunt consumer spending and new-home buying, and these developments could “lower inflation through Q42023 and into the new year,” said Carl Riccadonna, BNP Paribas’ chief economist.
Despite recent trends on the energy front, exploration and production companies widely expect Europe’s natural gas demand needs to endure, creating annual calls for American supplies to beef up stocks ahead of each winter. Major economies in Asia, too, are increasingly using gas to displace coal, and countries such as China are projected to increasingly compete for U.S. LNG.
As such, producers are gearing up for a wave of new Gulf Coast export facilities beginning next year. The new facilities would ship mounting levels of LNG to meet the enduring demand from Europe and increasing energy needs in fast-developing Asian countries.
Should that play out as expected, natural gas price increases could follow in 2024, according to Goldman Sachs Group analysts.
Weather, of course, is always critical, too. “Importantly, early winter cold can drive prices significantly higher as the uncertain duration and size of temperature deviations drives persistent risk,” said Goldman analyst Daniel Moreno.
He also noted that frigid temperatures can cause freeze-offs, impacting production by as much as 1.0% in a normal winter.
“Since freeze-offs are associated with colder temperatures, they typically exacerbate the net impact of weather on balances, leading to lower supply when demand is higher,” Moreno said.
The global market faces similar risks, analysts at the Energy Information Administration (EIA) said in a report this week.
“Unexpected surges in demand or unplanned supply outages could affect both price and global natural gas balances,” the analysts said.“Other supply disruptions could occur, such as a further reduction in pipeline exports from Russia transiting Ukraine, worker strikes at Australian LNG facilities, spread of the military conflict in the Middle East, or other potential unplanned outages affecting global supplies,” the EIA team added.
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