Market Newsletter – June 2019June 01, 2019
The arrival of the June and July prompt-month contracts have brought on substantially weaker commodity prices, as both oil (Brent/Crude) and natural gas continue to slide amid fears of a global economic slowdown. Coupled with a very mild weather pattern, one that is presently resulting in the coolest June since 2009, the price of natural gas recently fell to its lowest level since 2016 at $2.276 per MMBtu this month after trading to the highest price since 2014 at $4.929 per MMBtu last November. In short, the price of natural gas was more than double its current level at the end of last year, another reminder of just how volatile this commodity can be in the absence of supply/demand balance. That being said, there are a few burgeoning shifts on the horizon that could potentially begin to offer price support and put an end to the slide; if they don’t come to fruition however, we could see natural gas prices begin to test the 2016 lows of $1.611 per MMBtu.
As mentioned, nationwide demand for natural gas has been relatively muted outside of power burn (~50% of total demand during injection season) and there are only two or three potential offsets in the immediate future that I can see putting a halt (gradual or prompt) to the slide. Firstly, and this is one that continues to emerge, would be some actual heat in the summer to support cooling demand in major demand centers – presently there is a higher risk of extreme heat for the eastern seaboard later this summer, related to a number of atmospheric conditions over the North Atlantic and corresponding snowmelt spikes in Greenland. When exactly that might occur is anybody’s guess, as is always the case with weather, but late June and July-August could provide some desperately needed price support in the way of extended cooling demand. The second potentially price supportive shift would hit the supply side of the equation – namely, that natural gas prices are too low to support continued growth in production. Already in 2019, we have seen stagnation in production growth when compared to the previous five years, as I had mentioned last month. Even since April, we are ~2 Bcf/d off from the highs that were established. Nevertheless, we continue to see triple-digit injections into natural gas storage, and the injections into storage have been 40% higher on average this year when compared to the five-year average. But, most of those injections were timed when natural gas was still trading well above $2.50 per MMBtu. Over the past two weeks, natural gas has fallen almost $0.40 per MMBtu (~15%), certainly not a supportive metric for producers considering a boost to their capex for the second half of 2019.
Finally, looking ahead we can turn to two demand verticals that show no signs of slowing down in our search for price supportive indicators: exports to Mexico, and globally – via LNG. There’s a bit of a lag in the EIA reporting on this data, but there is one statistic that shouldn’t change for quite some time, provided the political landscape continues to allow for it: exports remain the fastest-growing source of demand for American natural gas. Next year, the natural gas share of exports will overtake domestic residential consumption (on a 12-month average basis).