Market Perspective: Natural Gas in The Summer of 2019
We are in the midst of an historic summer for U.S natural gas market dynamics. At the time of the writing of this post, the August 2019 prompt month natural gas contract is currently trading at $2.23/MMBtu. “…the U.S. Energy Information Administration (EIA) forecasts Henry Hub natural gas spot prices for June, July, and August this year will average $2.37 per million British thermal units (MMBtu). If realized, this price would be the lowest summer average Henry Hub natural gas price since 1998. EIA expects Henry Hub natural gas prices will be 55 cents/MMBtu, about 19%, lower than last summer’s average” Kristen Tsai, EIA. Historic market trends suggest that spring and fall tend to be the cheapest time(s) of the year to buy natural gas & and electricity. This summer has bucked that trend and mandated power and natural gas end-users to rethink their energy hedging strategies.
The story behind the recently unprecedented market is somewhat of a chain reaction or “domino effect”. It boils down to a combination of record natural gas production and mild weather. A mild end to the winter of 2018/2019 transitioned into an even milder spring, with neither persistent cold nor forecasts for extreme summer heat to bolster market prices. This led to less-than-expected natural gas fired electricity generation, which allowed the amount of surplus natural gas injected into storage inventory to outpace the five-year average rate. “Between April and June, cumulative net injections into underground storage fields have exceeded the five-year average by 41%” Kristen Tsai, EIA. Meanwhile, natural gas production has consistently reached new record-high levels month after month in 2019. “During the first half of 2019, EIA estimates that dry natural gas production averaged 89.9 Bcf/d, a 12.2% increase from levels in the first half of 2018” EIA. The record production can be attributed to international export growth, improved drilling efficiency, and higher associated gas production from oil-directed rigs.
Barring unforeseen events, the short-term story will continue to be a weather-driven one. Today we are closer to fall than we are to spring, and we just sustained a week of record heat across many regions of the country. Yet, here we stand near market bottom with the market sentiment overwhelmingly bearish.