Market Newsletter – May 2019May 01, 2019
As anticipated, April and May have provided ample opportunities for energy buyers to lock in (or slice off a decent piece of unhedged risk if on a managed product) both natural gas and electricity forward contracts at significant discounts to historical price levels. With the arrival of repeated triple-digit injections into working storage, we saw the 12-mo and 24-mo natural gas strips plummeting to around $2.65/MMBtu for the first time in several years (Spring 2016) in April and May. Coupled with relatively subdued demand resultant of mild weather, natural gas production has continued to chip away at the sizeable deficit since the beginning of the injection season and most of the concerns about where those levels will be next Fall have been put to rest. For those who have not felt so compelled to take advantage of favorable buying conditions driven by what is presently an imbalanced market (+17.5% bcf/d for unadjusted supply/demand), you still have some time. But not much.
While the present supply/demand balance remains bearish, those fundamentals are gradually shifting to more “rightful” positions due to a number of factors. In fact, some of that shift is already underway – as of Monday morning, natural gas futures rose to a five-week high as U.S. gas production hit a six-month low over the weekend (86.2 bcf/d), due to significant declines in both West Virginia (WV) and the offshore Gulf areas. While some of this drop in production is related to pipeline issues in WV, a fair share of it is associated with price producers availability of technology vs. their capex budgets. In a vacuum, this news would arrive with a slightly bullish sentiment, but it arrives on the heels of forecasted increased demand for the next week(s) tied to consumption by the power sector to meet higher cooling needs in much of the country. This effectively diminishes the surplus supply and establishes a much tighter balance heading into June. And, if the tighter balance persists throughout the summer months (and beyond), whether that be weather-driven, production-driven, or a combination of both, the market will likely continue to teeter on the viability and activity of one of our newest demand factors, which has increasingly come under focus, LNG exports.
LNG has finally been fully dragged into the fray that is the U.S.-China trade war. China has recently announced an increased tariff rate of 25% on U.S. LNG imports, up from the original 10% rate. While this represents a substantial increase, many believe it will have little-to-no impact on the short-term and long-term viability of LNG, as we stopped sending much of our LNG to China when the original 10% tariff was imposed. While much of the LNG will find a home elsewhere (and already has in Europe and Southeast Asia), the fact remains that the U.S. is the world’s fastest growing exporter of LNG, and China is the world’s fastest growing importer. And that is not changing anytime soon – just last week, FERC authorized additional liquification capacity at the Freepoint export terminal in Texas, a few weeks after fast-tracking two other LNG projects in Louisiana. There are currently 10 other LNG export projects pending at the Commission.