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U.S. Natural Gas Prices Finally Starting To Rise


© 2019 Bloomberg Finance LP

The U.S. natural gas market has seen the lowest summer prices since 1998. This is historic: we've been using more gas to generate electricity and exporting more gas than ever before. Increasingly relying on gas, our air conditioners have been ramping up more than prices would suggest. Gas consumed for electricity from May until the end of August was 35.2 Bcf/d, as compared to 34.2 Bcf/d for that time in 2018 and 29.9 Bcf/d in 2017.

It might surprise some that this summer has been 15% warmer than normal, but we’re still about 8% cooler than last summer. From May 4 until September 7, there were a cumulative 1,122 cooling degree days, versus the 975 days for the normal rate. Out of 19 weeks recorded this year since May, 15 weeks have been warmer than normal, with two weeks colder and two weeks equal to normal. We’ve had six straight weeks of warmer than normal weather, and prices since August 5 have risen almost 25% to $2.55 and are at their highest levels since the end of May. Demand destruction from Hurricane Dorian, however, has even helped soften the blow recently.

The WSJ reports that back in mid-August, short positions outnumbered longs nearly three to one, the biggest net short positions for speculators since 2008. Short bets have been cut by about a quarter over the past month. This rebound is all the more noteworthy since October, a lower demand shoulder month, has been the prompt-month trading contract for the past two weeks.

Data source: CME Group; JTC

The U.S. gas storage deficit to the five-year average has actually been slowly improving, now at just 2.5% below normal, or a 77 Bcf shortfall. We had a 78 Bcf injection reported today, bullish to the consensus estimate of 87 Bcf and pushing our total to 3,019 Bcf. Although the next couple of weeks look warmer than normal, we could flip the script before winter and finally retain a gas storage surplus. This would be a huge buffer heading in to winter when overall gas demand rises 40-60% from summer, largely to meet heating needs. And a 710 Bcf deficit last November 16 (19% below the five-year average) lifted prices to almost $4.90, when an early and cold start to winter led to a spike.

Also working to buffer the market, U.S. gas production has continued to rise. Output for August averaged a record 90.4 Bcf/d, as compared to 87.1 Bcf/d for May. Noteworthy as well, especially as the key incremental demand market, LNG feedgas averaged just 5.1 Bcf/d in August, compared to 5.6 Bcf/d in May. Sunken global prices and the trade row with China explain the fall, although more LNG is certain in the coming months. Piped gas to Mexico, meanwhile, was at 5.4 Bcf/d in August, up from 4.8 Bcf/d for May. LNG is the bigger market for the U.S., but more pipelines are gradually coming from South Texas into Mexico: “Mexico's Sur de Texas-Tuxpan pipeline begins flowing gas.”

All told, the unsustainably low prices that we’ve seen this summer are probably over for now. For years, the floor had been ~$2.50, yet we plunged through that this summer – and stayed there for months. From June through August, prices were stuck in the $2.07 to $2.45 range. Natural gas prices had to start moving up at some point as we come back to reality. And remember that it was right around the end of September last year when gas prices started their winter move up, breaking the $3.00 threshold on September 24 for the first time since mid-June.

It’s still premature though to confirm that this is the winter rise up for gas pricing. Indeed, the RSI hit a whopping 75.31 earlier this week, indicating an overbought market and a potential downward correction (e.g., prices pulled back 3 cents yesterday). Current near-term technical support stands at $2.52, with resistance at $2.60.

Overall, DOE has become more bearish on natural gas. Released just two days ago, its latest STEO forecast has Henry Hub prices averaging $2.55 in 2020, down from $2.75 for the August forecast. I’m more bullish than DOE on production and see us reaching at least 95 Bcf/d by the end of 2020. As our second largest gas play, accounting for 17% of domestic supply, “New Permian Gas Pipelines Will Reduce Flaring, But What About Prices?” DOE tracks seven pipelines with 15 Bcf/d of takeaway capacity slated for the mighty Permian, or about what the play produces today.

Please be sure to follow Jude on Twitter

 

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© 2019 Bloomberg Finance LP

The U.S. natural gas market has seen the lowest summer prices since 1998. This is historic: we've been using more gas to generate electricity and exporting more gas than ever before. Increasingly relying on gas, our air conditioners have been ramping up more than prices would suggest. Gas consumed for electricity from May until the end of August was 35.2 Bcf/d, as compared to 34.2 Bcf/d for that time in 2018 and 29.9 Bcf/d in 2017.

It might surprise some that this summer has been 15% warmer than normal, but we’re still about 8% cooler than last summer. From May 4 until September 7, there were a cumulative 1,122 cooling degree days, versus the 975 days for the normal rate. Out of 19 weeks recorded this year since May, 15 weeks have been warmer than normal, with two weeks colder and two weeks equal to normal. We’ve had six straight weeks of warmer than normal weather, and prices since August 5 have risen almost 25% to $2.55 and are at their highest levels since the end of May. Demand destruction from Hurricane Dorian, however, has even helped soften the blow recently.

The WSJ reports that back in mid-August, short positions outnumbered longs nearly three to one, the biggest net short positions for speculators since 2008. Short bets have been cut by about a quarter over the past month. This rebound is all the more noteworthy since October, a lower demand shoulder month, has been the prompt-month trading contract for the past two weeks.

Data source: CME Group; JTC

The U.S. gas storage deficit to the five-year average has actually been slowly improving, now at just 2.5% below normal, or a 77 Bcf shortfall. We had a 78 Bcf injection reported today, bullish to the consensus estimate of 87 Bcf and pushing our total to 3,019 Bcf. Although the next couple of weeks look warmer than normal, we could flip the script before winter and finally retain a gas storage surplus. This would be a huge buffer heading in to winter when overall gas demand rises 40-60% from summer, largely to meet heating needs. And a 710 Bcf deficit last November 16 (19% below the five-year average) lifted prices to almost $4.90, when an early and cold start to winter led to a spike.

Also working to buffer the market, U.S. gas production has continued to rise. Output for August averaged a record 90.4 Bcf/d, as compared to 87.1 Bcf/d for May. Noteworthy as well, especially as the key incremental demand market, LNG feedgas averaged just 5.1 Bcf/d in August, compared to 5.6 Bcf/d in May. Sunken global prices and the trade row with China explain the fall, although more LNG is certain in the coming months. Piped gas to Mexico, meanwhile, was at 5.4 Bcf/d in August, up from 4.8 Bcf/d for May. LNG is the bigger market for the U.S., but more pipelines are gradually coming from South Texas into Mexico: “Mexico's Sur de Texas-Tuxpan pipeline begins flowing gas.”

All told, the unsustainably low prices that we’ve seen this summer are probably over for now. For years, the floor had been ~$2.50, yet we plunged through that this summer – and stayed there for months. From June through August, prices were stuck in the $2.07 to $2.45 range. Natural gas prices had to start moving up at some point as we come back to reality. And remember that it was right around the end of September last year when gas prices started their winter move up, breaking the $3.00 threshold on September 24 for the first time since mid-June.

It’s still premature though to confirm that this is the winter rise up for gas pricing. Indeed, the RSI hit a whopping 75.31 earlier this week, indicating an overbought market and a potential downward correction (e.g., prices pulled back 3 cents yesterday). Current near-term technical support stands at $2.52, with resistance at $2.60.

Overall, DOE has become more bearish on natural gas. Released just two days ago, its latest STEO forecast has Henry Hub prices averaging $2.55 in 2020, down from $2.75 for the August forecast. I’m more bullish than DOE on production and see us reaching at least 95 Bcf/d by the end of 2020. As our second largest gas play, accounting for 17% of domestic supply, “New Permian Gas Pipelines Will Reduce Flaring, But What About Prices?” DOE tracks seven pipelines with 15 Bcf/d of takeaway capacity slated for the mighty Permian, or about what the play produces today.

Please be sure to follow Jude on Twitter

 


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