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“She turned to the sunlight
And shook her yellow head,
And whispered to her neighbor:
“Winter is dead.”
-A.A. Milne, When We Were Very Young 

Not only is Winter officially dead, but it seems it never drew breath to begin with this year. Per NOAA, the last month of 2019 was the second-warmest December in the 140-year recorded history, January 2020 was the warmest ever during the same time period, and this February could very well be on track to top the charts as well. As mentioned last month, this has significantly impacted national heating demand, resulting in muted average withdrawals from working underground storage, and both natural gas producers and prices (April contract is trading below $1.70/MMBtu) have borne the brunt of the impact. It certainly did not help that natural gas production continued to peak throughout the end of 2019, culminating in November, just ahead of Winter’s expected arrival. With Spring looming on the horizon, weather models will begin to have less of an impact on daily price movement, and analysts will turn their attention to the remainder of the fundamental factors at work as the prompt contract flips from March to April – namely: production, fuel-switching/power-burn, and exports.

As previously mentioned, natural gas production has been steadily declining since the beginning of the year due to the unfavorable associated economics, a trend that is expected to continue throughout the remainder of 2020. The EIA estimates dry gas production will drop by 600 Mcf next year, the first annual decline since 2016. This should help to support natural gas prices moving forward. HFI research has reported that heading into Spring last year, the structurally oversupplied market resulted in ~2 Bcf/day in surplus, while 2020 should reflect a slight deficit of around 1 Bcf/day. This will result in smaller injections than what we saw last year, which as a reminder, when combined with a lack of any real demand spikes, have led to the massive 40.8% difference in storage levels we are seeing now compared to a year ago.

The fuel-switching/power burn picture isn’t quite as bullish presently, as strong hydro, solar and wind generation is having a negative impact on power burn. That said, seasonal nuclear maintenance on the heels of outages is expected to increase in the near future (mid-April), resulting in a mildly bullish picture for natural gas consumption in the electricity generation sector. Additionally, utilities continue to be incentivized to utilize natural gas over coal.

LNG exports continue to be one of the most dynamic and important price-supportive activities. There has been a lot of discussion over LNG shut-ins as some (2) shipments have been turned away from Asia in the wake of the Coronavirus outbreak, though due to the take-or-pay structure of these LNG contracts, and the fact that most April/May shipments are already locked, the concerns should be alleviated heading into the Summer months. Overall, coupled with decreasing production growth, this helps in creating an environment in which the natural gas market can begin to recover, as the fundamental supply/demand pendulum swings back toward center.

Winter may be dead in 2020, but as is true in nature, the death of anything leaves a void and remnants that are often utilized for growth by other forces at work. I expect A.A. Milne’s daffodil to be embodied by continued growth in exports and a market that corrects itself through more capex cuts and continued decreased production.

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