Natural gas futures soared over the summer months, driving up costs for utilities that bought gas ahead of the fall months and then passed along the hikes to consumers, new federal data show. More inflation lurks as winter weather and heating demand near.

The U.S. Department of Labor on Thursday (Oct. 13) said overall consumer inflation broadly held near a 40-year high – the consumer price index increased 8.2% in September from a year earlier and 0.4% from the prior month. Annual inflation hit a peak this year at 9.1% in June.

Energy prices that jumped 19.8% in September from a year earlier continued to drive the headline number. However, some recent easing helped to draw down overall inflation. Cumulative energy inflation month/month declined 2.1% in September after falling 5.0% in August. Lower crude prices amid global recession concerns and, by extension, falling gasoline costs for Americans fueled those declines.

That noted, energy costs remain lofty in large measure because natural gas prices spiked more than most other major categories this year. In the event of a harsh or prolonged winter, higher gas prices could add another heaping dose of inflationary pressure in coming months.

The Labor Department’s natural gas index rose 2.9% month/month in September after increasing 3.5% in August. The September reading soared 33.1% from a year earlier.

The electricity index in September increased 0.4% month/month and 15.5% over the past 12 months.

Pocketbook Pain

“There’s no question” natural gas “price pressure has been strong and winter could drive another jump,” Samco Capital Markets’ Jacob Thompson, managing director, told NGI.

To be sure, natural gas futures and cash prices both softened from summer highs during September. The arrival of autumn weather in concert with higher production levels eased upward price pressure. Output topped 102 Bcf/d in early October, a record in Bloomberg’s data set.

Natural gas futures fell each week in September and through the first half of October.

The fall swoon, however, followed massive bull runs over the summer months that sent natural gas futures near $10.00/MMBtu and to 14-year highs. Producers ramped up to meet the demand and capitalize on the favorable prices.

The U.S. Energy Information Administration (EIA) this month said American households that use natural gas to heat their homes could see prices soar 51% above year-earlier levels for October through March in a scenario where temperatures are 10% colder than baseline expectations.

The agency’s latest Winter Fuels Outlook, included in its updated Short-Term Energy Outlook, forecast a 28% year/year increase this winter if temperatures during the season hover around average. Projected cost increases for natural gas are the largest among the household heating sources looked at in EIA’s modeling.

EIA noted forecasting from the National Oceanic and Atmospheric Administration pointed to slightly colder temperatures compared with last winter, which would drive higher consumption levels “across all fuels and regions.”

Such outlooks portend pocketbook pain for consumers – and a heavy contribution to overall inflation – but could prove positive for producers’ profitability, Thompson said. While output is holding above 100 Bcf/d this month, he said, robust supplies may ultimately be needed to meet demand.

Global calls for U.S. exports of LNG add substantially to that scenario. Europe, ensconced in geopolitical turmoil amid the continent’s fierce opposition to Russia’s war in Ukraine, has been buying as much liquefied natural gas as it can get to offset lost Russian imports. Prior to the war, Europe depended on Russia for about a third of its natural gas.

As such, demand for U.S. supplies is projected to remain elevated through the winter.

Oil Price Rebound?

Crude prices, meanwhile, ballooned during the spring months and early summer amid Russia’s invasion of Ukraine and concerns about global supplies. U.S. benchmark prices topped $120/bbl in June and hung near the highest levels in a decade.

The United States earlier this year banned imports of Russian oil and the European Union (EU) followed suit, raising global supply worries as summer travel season heated up and oil demand rose.

West Texas Intermediate prices, however, have since dropped below the $90 level. Multiple rounds of central bank interest rate hikes aimed at combating inflation – in the United States and Europe – have slowed economic activity and, by extension, demand for gasoline and other fuels derived from oil. Lingering pandemic-related challenges in China add another demand hindrance.

Domestically, EIA said total petroleum products supplied over the last four-week period ended Oct. 7 averaged 20.0 million b/d, down 4% from the same period last year. Over the same stretch, motor gasoline demand averaged 8.7 million b/d, down 6%, while distillate fuel consumption averaged 4.0 million b/d, down 4%. Demand had edged lower in the late summer, too.

This helped push down the overall energy inflation figure the past two months, as well as the overall consumer price index reading, said BNP Paribas’ Carl Riccadonna, chief U.S. economist.

However, with the EU set to impose price caps on Russian oil as part of another round of sanction to protest the Kremlin’s invasion of Ukraine, supplies could come under more pressure during the final months of 2022. If Russia’s options were hindered by price caps, it could remove supply from the global market, researchers at the International Energy Agency (IEA) said.

That would come on top of an OPEC-plus decision to cut its output by 2 million b/d next month. Several analysts said this could drive supply/demand out of balance and bolster prices just as inflationary headwinds threaten to cripple consumer spending and, by extension, major economies.

“Looming Russian oil price caps and related supply disruptions could further inflame price pressures. As a result, we view inflation expectations in the current quarter as being particularly vulnerable to rebounding gasoline prices,” Riccadonna said.

Against the backdrop of high energy costs, OCI Limited Group CEO Oliver Chapman said the most likely catalyst for enduring downward pressure on inflation is high borrowing costs. When rates rise, loan payments jump in tandem and both consumers and businesses tend to pull back on any spending that requires credit. The result: economic weakness that ultimately curbs demand and prices.

“Rising interest rates at a time of high private-sector debts will probably lead to a contraction in demand,” Chapman said. “This contraction will help reduce inflation but may create a recession in the process.”