Winters are in full swing in most parts of the world and the soaring natural gas prices have become a reason for worry for many people. As the coldest months of the season and the holidays approach, people will naturally have to use more gas. This in turn will mean a much higher energy bill. As per an article by the Guardian, the energy bills for people in the UK can hit a whopping amount of £4,266 a year from January of 2023. This can result in serious hardships for working-class people in the UK.
Alt Text: image depicting natural gas on a gas burner
The condition is quite similar in the US and other countries of the world too. In the US, crude oil prices are going down but shockingly, natural gas prices have remained at an elevated level. Gasoline prices have hovered around $4.11 a gallon at different stations across the United States.
Along with the west, countries in Asia like Pakistan are also facing a tough time. Due to the increasing natural gas prices in the global commodity trading market, Pakistan has no option other than rationing the natural gas supply.
It is a surprising situation as, generally, natural gas and oil prices move together in the same direction. Further, as crude oil and natural gas are the most common and important products in the commodity trading market, this creates an overall confusing situation.
Relationship between the prices of natural gas and crude oil
Usually, there is a positive correlation between the prices of natural gas and crude oil. Both of them are powerful energy commodities affecting the daily lives of people. While their demand and prices are dependent on different fundamental forces (as their uses are different), they often move in the same direction.
The current situation of the oil prices going down while the natural gas prices rise or stay at the same elevated level is surprising, but not unheard of. An E&E News reporter, Ben Storrow says that “…this situation does seem weird. However, it is something economists do expect and have studied for a long time.”
Why are natural gas prices so high while crude oil prices go down?
Previously, COVID-19 and then the Russia-Ukraine conflict caused crude oil, petroleum, and natural gas prices to spike. When Russia invaded Ukraine earlier this year, crude oil prices soared to a record high amount of $130 a barrel in early March.
As soon as the conflict began, Western countries put various sanctions on Russia and banned the import of oil and natural gas products. Since Russia is one of the largest exporters of gas and oil, it became difficult for the west to meet their global crude oil and natural gas demand.
To fulfill its demand for liquid natural gas (LNG), European countries began outbidding Asian countries for the LNG supply. This resulted in a huge spike in natural gas in Asian countries like India, Bangladesh, and Pakistan. In fact, Pakistan will have to ration gas supply to meet the demands of all the citizens this winter. What this means is that Pakistan households will get the gas supply for a limited number of hours in a day.
Another reason gas prices have seen a major rise recently is due to a lower number of gas refineries. When the pandemic began in 2019, the demand for gas greatly reduced. Due to less demand, many refineries, especially those in the US and Europe, suffered heavy losses and were forced to shut down. Since the demand for gas was also down back then, shutting down those refineries was a wise decision. However, as the demand has started rising once again, the shortage in refineries is proving to be a major disadvantage.
While the demand for natural gas is constantly increasing, governments are finding it hard to get enough supply from the commodity trading market and meet the demand. This has caused the prices to rise and resulted in a truly worrisome situation for millions of households all across the globe.
Then why are the oil prices decreasing?
Alt text: An offshore oil rig
While gasoline prices continue to rise, one may wonder, why is crude oil getting cheaper? One of the biggest reasons for the fall in crude oil prices is low demand. Most countries in the world are witnessing slow (or even negative) economic growth. The rising inflation in major countries like the United States has made the demand for oil and petroleum products plummet. Furthermore, the demand for oil and petroleum products always goes down during periods of recession.
Thus, the fall in demand has reduced the prices of crude oil globally.
Will natural gas prices decrease anytime soon?
Crude oil and natural gas are two of the most important commodities and accurately predicting their prices is not easy.
The market imbalance caused by COVID-19 and the Russia-Ukraine conflict has increased oil and gas prices in the last few months. While crude oil prices have started coming down, consumers are still waiting for some relief in gas prices.
The common phenomenon is that when the prices of crude oil begin to rise, the natural gas prices also see a hike. But when crude oil prices go down in the global market, gas suppliers take their time to lower the gas prices. This discrepancy between prices enables the gas suppliers to earn some good profits. The gas station owners make the most money in this way only.
Thus, as crude oil prices have already started going down globally, consumers can expect to have some relief regarding gas prices too. However, how soon this will happen remains to be seen.
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