Market Newsletter – August 2018August 01, 2018
Back in July, I noted that the momentary lulls in both natural gas prices, and in the corresponding power prices (in areas where gas-fired generation is prevalent enough to move the weekly/daily needle) were providing some unique purchasing opportunities for subsequent supply agreements. Typically, we are witness to consistent and gradual upward price movement in the summer months, when cooling demand reaches its peak alongside the commercial and industrial demand verticals. Those who were able to take advantage of the atypical market lulls in July should feel confident in their decision to act, as the entire month of August has been one slow creep up from the $2.75 low marks we saw in July. As of today, the prompt month (September) contract is trading just a hair under the $3.00 mark ($2.95), and the upcoming 2018-2019 winter months are all trading at or above their yearly highs ($3.05-$3.15).
While this recent increase in prices is by no means a surprise for the aforementioned reasons (converging demand verticals), it is currently being exacerbated by a bullish short-term weather outlook, increased LNG exports, and generally unimpressive natural gas storage injections over the past few weeks when compared to previous years’ injections for the same week. All of this is compounded by two main considerations that, in tandem, seem to fly in the face of logic; 1) natural gas production continues to report record-setting figures, and 2) in general, the failure to significantly decrease the present deficit to the 5-year average of working gas in underground storage (20%). However, when you consider that coal and nuclear baseload generation continue to come offline and are replaced by both natural gas-fired and renewable means of generation, the expected gains in natural gas storage levels are being swept away quickly by power burn and increased LNG exports. China has recently alluded to a potential tariff imposition on U.S. LNG imports to the clip of 25%, but that has yet to be finalized and it appears the opportunity cost is simply too high for China to follow through on that threat. In short, while there is some uncertainty surrounding long-term LNG contracts with China, LNG exports are likely safe for now due to China’s heavy reliance on foreign energy products as it attempts to move away from coal as a generation fuel.
If the swirling talks regarding a potentially ‘colder than normal’ winter come to fruition, and development in the LNG vertical continues unencumbered by tariffs, we could be looking at a potential supply short-fall this winter in the absence of some record setting injections that can flip the current bullish sentiments in the market on its head. As usual, much of this will be determined by mother nature in our current highly weather-sensitized market.