The Surprising Jump In U.S. Natural Gas Prices
Through the worst public health crisis in many decades, U.S. natural gas prices were low and stable from January until the end of July. For the first half of this year, prices were just $1.81 per MMBtu, their lowest since at least 1989. But unpredictably so, August proved to be a much different story. Prices through the month rose nearly 45%. We are now seeing the highest prices since mid-November – seemingly out of nowhere.
Analysts are scrambling to describe what happened in August to surge gas prices. But neither the technicals nor the fundamentals neatly explain such a jump. The weather was nothing bullish, and gas storage has been overflowing. At 3,420 Bcf, we now have a 20% surplus to year-ago levels and 15% more than the five-year average. U.S. gas production, however, has been mostly flat. Output for August was 86-87 Bcf/d, down from the 93-94 Bcf/d level we were at pre-pandemic. And this past week, Hurricane Laura shut-in “82% of oil, 59% of natural gas output in U.S. Gulf of Mexico” so national output did dip to 85 Bcf/d.
But still, especially as the shale-era since 2008 has lifted our production zones away from the vulnerable Gulf of Mexico to the inland shale plays like Appalachia and the Permian basins, hurricanes should be mostly bearish events. They lower gas demand by cutting electricity needs and shutting-in exports. In particular, the southeast and southwest regions have installed huge coal-to-gas fuel switching. Florida, for instance, has used gas to generate a staggering 76% of its electricity for the first half of 2020. This past week, U.S. LNG exports were shut-in from Hurricane Laura, with feedgas demand falling from 5.2 Bcf/d to 2.0 Bcf for August 22-27.
We all knew that gas prices were unsustainably sunk for the first seven months of 2020, generally in the extremely low range of $1.60 to $1.90. This is especially true since natural gas is on its way to surpass oil and become our most vital source of energy – likely at some point within the next five to seven years. Through the ongoing pandemic, U.S. gas usage could be classified as “surprisingly high and on par with year-ago levels.” In fact, we set a record for gas power generation in July, one day hitting a whopping 47 Bcf/d.
Easily the most bearish factor for the gas market through COVID-19 has been the huge drop in U.S. LNG exports, which hit a booming ~9.6 Bcf/d at the end of January until spiraling to ~3.3 Bcf/d for July – driven by low prices and demand globally. This past week, however, U.S. piped gas exports to Mexico were up to all-time record levels at 6.7 Bcf/d. All told, U.S. gas consumption for the three main sectors of power, industrial, and res/comm was at 73-75 Bcf/d for August, right where it was for July.
Looking forward, the U.S. Energy Information Administration has natural gas prices averaging $2.11 this year and $3.25 for 2021. The primary explanation for such a jump is that the Administration sees production continuing to fall, averaging just 84 Bcf/d next year. Not me. I see higher prices for both oil and gas bringing on more supply, reaching back up over 90 Bcf/d in a matter of months. We will need the new production because winter demand spikes 40-60% over summer, not to mention a much-improved outlook for exports.
But with the RSI hitting 73 on Friday, an overbought market is already beginning to pull pricing back down a bit, down 8% this week to $2.45 as of this morning. And temperatures are cooling down. Stay tuned, as we saw in 2018 (almost hitting $5.00) and 2019 (almost hitting $4.00), November is that mountain on the horizon. November is the key month for gas prices to really spike – with a cold and early start to winter prone to spooking the market.