Hot Start to Summer Elevates Natural Gas Prices but Futures Remain Attractive

Since early February 2018, natural gas has been on a steady incline. In the short term, power burn (natural gas used to generate electricity) remains elevated y-o-y as increases in cooling demand in May/June have increased demand and stymied natural gas storage injections (Power Burn accounts for about 50% of natural gas demand). Additionally, coal-to-gas power plant generation switching is 33% above the 5-year average. This means that despite increases in natural gas prices since February, we are still switching from coal to natural gas which has not been the trend historically. Finally, weather has been extremely bullish since April 30th and the major weather outlets are forecasting mid-July before Cooling-Degree-Days normalize.

Generators switch fuels sources from coal to natural gas when natural gas prices go down. The red charts within the below diagram illustrate this trend as well as how the Oct-March period switching reduces to ensure adequate winter supplies.

Source: Blugold Research

Despite these fundamentals supporting prices, the market could not sustain levels above 3 dollars/Mmbtu. US gas supplies are at an all-time high which is acting as a ceiling for prices regardless of weather forecasts. With the daily supply/demand of natural gas in balance, a surplus is likely if/when July weather normalizes. Since we are already trading toward the top of the range and could not sustain a rally past 3 dollars, any bearish weather outlooks that are realized should reduce natural gas prices. If the summer cooling season normalizes, injections will be close to the 5 year average which will put a lot of pressure on the fall to dictate winter prices.

Forward Natural Gas Strips Remain Attractive

Forward natural gas prices past 2019 remain attractive and have again set new all-time lows. The market is content with our ability to quickly and efficiently extract the gas and deliver it into the marketplace. Historically, natural gas storage levels and natural gas prices have an inverse relationship. In 2014, we had historically low storage and record-high prices. In 2016, we hit an all-time high for storage levels and prices dropped to a 17-year low. Today, storage sits well-below the 5 year average, but prices have not reacted nearly as much as they have in the past. Production seems to be putting us at ease which could be a long-term signal that volatility will diminish.

Major Increase in Forward NYISO Power Strips

NYISO forward calendar strips are reacting to last month’s release of NYISO’s five-year project deployment plan. This outlined several market changes, most notably a carbon pricing initiative. This is a cost applied to carbon pollution to encourage producers of emissions to reduce their carbon footprint. The 2021 and 2022 New York City (Zone J) electricity strips increased over five dollars per mega-watt hour, approx. 24% higher than their all-time lows respectively. Other major electricity hubs remain within 10% of their all-time lows for 2019-22, except for Texas and California.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company mentioned in this article.

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