https://oilprice.com/Energy/Gas-Prices/The-Perfect-Storm-Sends-Natural-Gas-Crashing.html
[Another domino. Note the U.S. natural gas surplus is a multi-year
trend with fracking creating more production while warmer (on average)
winters are reducing a major source of demand. The growing push for
hydrogen as a fuel is more likely related to this growing surplus of
natural gas than the myth of hydrogen as a 'green' fuel. Note also that
the price of natural gas is so low that oil wells in Texas - which is
criss-crossed with gas pipelines - that natural gas is being flared
rather than captured for sale. The falling prices for alternate energy
are also mentioned as a driver.]
The Perfect Storm Sends Natural Gas Crashing
By Julianne Geiger - Feb 27, 2020
If you’re waiting for natural gas prices to recover, you might be in for
a considerable wait, as inventories are expected to hover well above
their five year average for the remainder of the year, the EIA has
forecast, painting a rather sour picture for the industry that has seen
investments stifled due to the lower prices.
In fact, inventories later this year will reach levels never seen before
if forecasts prove accurate.
The Nitty Gritty of Nat Gas Supply and Demand
According to the Energy Information Administration Short-Term Energy
Outlook (STEO), working natural gas in storage in the Lower 48 will end
the current heating season—which ends on March 31—at 1,935 billion cubic
feet.
This is 12% above the previous five-year average.
Now, we’re about to head into what the industry refers to as “the refill
season”. Normally, the end of the heating season is when inventories are
at their lowest. Now, we’re heading into this stockpiling season with
inventories that are high. So we will be amassing even more nat gas in
inventory as heating demand falls off.
The EIA estimates that we will end the refill season, which runs until
the end of October, with 4,029 billion cubic feet. This would be the
largest monthly level of nat gas we’ve ever had in storage.
At the end of January, inventories had already reached 2.6 trillion
cubic feet.
COVID-19 and the Weather
The COVID-19 outbreak—likely soon to be pandemic—might be the obvious
target on which to lay blame for the increasing inventories. After all,
it is responsible for demand in crude oil.
But that is only a piece of the puzzle, with weather, weather, weather
topping the list of critical factors that are affecting natural gas
inventories.
January 2020 was the fifth warmest January on record—that’s out of over
125 years of data. January 2020 saw average temperatures of 35.5 degrees
F across the United States. This is 5.4 degrees more than the 20th
Century average, according to the US Department of Commerce’s National
Oceanic and Atmospheric Administration.
The problem? It’s just been so warm that the need for heating has been
reduced, depressing demand. And while production has not fallen with
demand, inventories have bloomed. Add to that unfavorable price scenario
the fact that COVID-19 is spooking the market and further denting
demand, and you have a perfect storm for lower nat gas prices.
Oftentimes, these lower price points created by subdued demand in one
sector courtesy of the mild weather will create additional demand from
other segments. Large-volume users such as power plans or iron and steel
mills have the ability to switch between nat gas and coal or even
petroleum—and they will choose the lowest cost ones. So as natural gas
in storage climbs and prices fall, one would expect a bit of an uptick
in demand from some of the other sectors.
But it has done little to mediate inventories.
While weather has been the primary driver of the lower nat gas prices,
COVID-19 is worth a mention. The virus is expected to strip away 10bn m3
from China’s 2020 gas demand alone, according to Sublime China
Information. Most of this demand destruction will be seen in Q1. For
China, some are expecting gas demand to return to normal by March, if
things don’t get worse—a condition that public health officials are
saying is likely to happen.
Production Won’t Fall Off Enough
Natural gas production has shown no signs of slowing throughout 2019. In
fact, in 2019, US natural gas production was at record levels, averaging
92.1 billion cubic feet per day. And 2020 isn’t looking any better.
Related: Russia: Coronavirus Impact On Oil Is Worse Than Expected
Towards the end of 2019, average production was higher than at the
beginning of 2019, so while the EIA sees monthly production declining in
2020, from 95.4 Bcf/d last month to 92.5 Bcf/d in December, the average
for 2020 is still expected to be 2% higher than the average of 2019.
Inventories Up, Prices Down
This weather phenomenon combined with robust production is tanking the
price of natural gas. The Henry Hub spot price averaged $2.02 MMBtu. But
after the first week of February, prices had fallen to $1.86 MMBtu. Even
through the remainder of the heating season, when inventories typically
contract, the EIA expects nat gas prices will stay below $2 MMBtu.
Prices should tick up in Q2, the EIA says, with an overall average price
of $2.53 MMBtu for the year.
Whether its weather or COVID-19, record inventories for nat gas are
likely on their way. And with record inventories comes low prices—a fact
that offers traders about as much certainty as they’re going to get in
this volatile market.
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