Market Newsletter – October 2018October 01, 2018
Over the past month, the spot price of natural gas has risen almost $0.40 as a confluence of present (yet temporary) market conditions have given the bulls some confidence heading into withdrawal season. As previously mentioned, natural gas inventories will undoubtedly be at historically low levels heading into this winter – most end-of-season storage estimates are around 600-700 bcf below the 5-year average, or about 16-17% below the levels we are accustomed to seeing as winter approaches. This year, the injection season should officially end on November 2nd as injections will continue to diminish in size over the next three weeks, with a very small injection expected to come in on November 9th. So, what does this mean now that the supply side of the equation is more or less cemented? Well, there are a few potential outcomes depending on one major variable (weather) and few other destabilizing factors that will come into play both now and in the future.
Putting weather aside for the time being (outlooks still vary) – let’s focus on some of the more indirect factors influencing demand. I’ve noted for some time that exports will continue to influence how record domestic production is being offset – both by pipeline and by LNG to Asia, exports are increasing on a long-term basis. In addition, industrial demand is also slightly higher. To a large degree, gas-fired electricity generation is the most important factor in the demand category. Structural demand, weather sensitive demand, and price elastic demand (where gas competes with coal) all come into the fold here. Gas demand for power generation has been way up this year as new gas-fired generation has found a cosy nook in the wake of both coal and nuclear power plant decommissioning. At the same time, renewables are continuing to fill in the remaining gaps. The important thing to keep in mind however, is that natural gas production is viewed as potentially capable of keeping pace with these various demand verticals, and possibly even out-pacing them, though that is a much muddier timeframe and would only come about in the presence of continued subdued demand (which is unlikely).
With inventories as low as they are, and the possibility of a cold winter looming, it is possible we could be looking at a genuine shortage, which would send both natural gas and electricity prices soaring, both in the short-term and until supply/demand normalizes. As it stands, there is a rough estimate of about 10% that we experience a heating anomaly that would push inventory levels down to 2014 (polar vortex) lows, when Henry Hub Spot averaged $6.20 in February and $5.06 in March, and $4.54 for the calendar year.