Why are gas prices so volatile?

The invasion of Ukraine by Russia in 2022 had significant implications for the global gas supply chain, and caused what many termed a gas crisis. The reduction in supply led to a dramatic rise in gas prices globally.

Indeed, gas prices in Europe reached unprecedented levels, impacting energy costs across the continent. The price hikes were not limited to Europe; they affected global markets as countries competed for alternative sources of natural gas. The increased demand for liquefied natural gas (LNG) further strained global supply chains and drove up prices.

Yet, at the start of 2024, gas prices plunged globally, before rising again in recent weeks.

This volatility of the global market has had an impact on Bangladesh and its industrial base, which mostly depends on gas to remain operational. Natural gas is the primary source of energy in the country, used extensively for electricity generation, industrial processes, and others.

If manufacturers crave anything, it is stability. Sharp movements in commodity prices create uncertainty and can have a huge impact on the balance sheet.

With energy being a huge variable cost for manufacturers, the question arises: what has been causing the gas price volatility around the world?

There are several factors at play. First, supply and demand are the primary factors influencing gas prices. When supply exceeds demand, prices tend to fall, whereas prices rise when demand outpaces supply. Factors affecting supply include natural gas production levels, import/export volumes, and storage inventories. Demand is driven by consumption in residential, commercial, and industrial sectors, as well as power generation. Seasonal variations, such as increased heating in winter and cooling in summer, also play a significant role. Technological advancement in extraction methods can boost supply, while economic growth can drive higher demand. Conversely, a slowdown in industrial activity or warmer-than-expected winter temperatures can reduce demand, leading to lower prices.

Second, extreme weather events, such as cyclones, can disrupt gas production and distribution infrastructure, causing supply shortages and price spikes. Seasonal weather forecasts and unexpected weather patterns can therefore create significant fluctuations in the gas market. Accurate weather forecasting is crucial for market participants to anticipate demand changes and manage price risks. Overall, weather remains one of the most unpredictable and influential factors in gas price determination.

Third, the overall economic environment heavily influences gas prices. Economic growth generally leads to increased industrial activity and higher energy consumption, including natural gas. Conversely, during economic downturns, industrial activity slows, reducing demand for gas and exerting downward pressure on prices. Inflation and currency fluctuations can also affect gas prices by influencing production costs and the purchasing power of importing countries. Additionally, economic policies, such as interest rate changes, can impact investment in gas infrastructure and production capabilities.

Fourth, global market dynamics, including geopolitical events, trade policies, and competition with other energy sources, significantly impact gas prices. Geopolitical tensions in key gas-producing regions can lead to supply disruptions and price volatility. For instance, conflicts in the Middle East or trade disputes involving major exporters like Russia can create uncertainties in supply chains. International trade policies, including tariffs and export regulations, also affect the flow of natural gas across borders. Moreover, the competition between natural gas and other energy sources, such as oil, coal, and renewables, influences pricing. When prices of alternative fuels change, it can shift the demand for natural gas. Global market influences emphasise the interconnected nature of energy markets, where events in one region can ripple across the world, affecting gas prices.

Fifth, government policies and regulations are also crucial in determining gas prices. Environmental regulations, such as carbon pricing and emissions standards, can affect production costs and operational practices in the natural gas industry. Subsidies or incentives for renewables can also shift demand away from gas, influencing its market price. Policies related to exploration and drilling, such as permits and land use regulations, impact the availability of natural gas supplies. Additionally, international agreements and policies on trade and energy cooperation can affect gas exports and imports. Strategic reserves and emergency response policies can mitigate price spikes during supply disruptions.

Overall, government actions at local, national, and international levels play a significant role in determining the regulatory landscape, market behaviour, and ultimately, the price of gas.

So, how can Bangladeshi manufacturers withstand the impact of fluctuating gas prices? The obvious ways are via diversification of energy use and energy efficiency improvement.

Manufacturers can also use financial instruments such as futures, options, and swaps to hedge against natural gas price volatility. These financial tools allow companies to lock in prices or set price caps, providing more predictable energy costs.

Finally, negotiating long-term supply contracts with natural gas providers can offer price stability. These contracts often include fixed or capped prices, which can shield manufacturers from short-term market fluctuations.

Mostafiz Uddin is the managing director of Denim Expert Limited. He is also the founder and CEO of Bangladesh Denim Expo and Bangladesh Apparel Exchange (BAE).