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The Unexpected Jump In U.S. Natural Gas Prices

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Holy smokes. October prompt month natural gas price is up 21 cents to $2.98 per MMBtu this week (8%), despite the fact that Hurricane Florence was supposed to be a somewhat bearish event by wiping out electricity demand. Gas this year has accounted for 15% of electricity in South Carolina and 30% in North Carolina. Nearly 1 million people lost power.

Generally, we have been stuck in this $2.77 to $2.98 range for months now. Prices have not hit the $3.00 mark since June 15, which is the only daily close at that level since the end of January. It's a price that has had massive technical resistance surrounding it, with gas being unable to get over that hump.

We have had about a 3 Bcf/d of surplus in the gas market, with rapidly rising production keeping prices low, up 5% in the past two months alone. And the tremendous rain/flooding that was supposed to significantly lower output in Appalachia - an area that now produces 37% of all U.S. gas - wasn't exactly realized. Overall U.S. production is still in that record 82 to 84 Bcf/d range. Demand has been remarkably consistent in recent months, at ~78 Bcf/d.

But very low gas inventory levels are the key looming bullish factor in the market, now 18% below the five-year average. Despite a pretty hefty 86 Bcf injection reported today, which was on target with expectations and 10% above the five-year average, prices jumped 7 cents.

Now with 2,722 Bcf in gas stocks, we've continually been playing catch-up for storage.

To start the year, during the first three weeks of January we had the two largest pulls from gas inventory ever to meet record heating demand during the "Bomb Cyclone." April was the coldest it has been in over 20 years, and gas storage at the end of that month was nearly 30% below the five-year average. We also had the hottest May in recorded U.S. history.

In sweltering July, we saw the most amount of gas ever used for power generation, averaging 37 Bcf/d, and August devoured just slightly less than that. Even with Florence, it has been a very hot September, with power burn 7 Bcf/d higher this month to over 35 Bcf/d compared to last September.

Record hot summer? Cooling degree days this year have been 18% higher than last year and 25% above normal.

Also noteworthy is that exports to Mexico have also been surging to record highs, consistently passing 5 Bcf/d for the first time ever.

So being realistic, still sub-$3.00 gas doesn't look so bad with such a large storage deficit. Longer term, all the way out to 2025, there's only three months above $3.00 on the NYMEX futures curve, all this coming winter (Dec, Jan, Feb). Historically low and stable gas prices in the shale-era.

Data source: EIA; JTC

Yet, the coming injections are now expected to be below normal, expanding the gas deficit even more.

In fact, we could actually see heating demand next week, with blue all over the week and two week maps. Dear fall: for my own sanity, please don't escape us.

Looking at recent history, we got a problem brewing. When the winter gas market hits in mid-November, we will come in 13%-15% below where we were last year and ~20% below where we were to start the winter of 2016-2017. That was when, despite record storage of 4,050 Bcf in November, prices surged 40% in 40 days to close December 2016 at $3.93. Even more remarkable given that prompt month gas was just $1.64 on March 3 of that year.

The market reality has been gradually settling in that we will start this winter with the least amount of gas in the ground since 2003, five years before the shale revolution took flight. Let me be clear: even though they will come fast and furious, be sure to take winter forecasts with a grain of salt. When heating degree days are considered, the reality is that our winters have been getting less severe. This is a general trend that is down 25% since the 1950s, according to EIA data.

In winter, the gas demand market to watch does shift from electricity to heating, both residential and commercial. For example, summer gas for electricity accounts for nearly 50% of all U.S. gas demand, and that falls to 20%-25% in winter. Residential demand, meanwhile, booms from 5% of U.S. gas use in summer to 30% during the winter.

For sure, $3.60 and above natural gas is surely in the cards for this winter. The good news is that gas production is not seasonal like demand, which typically spikes 40%-55% in winter.  

And more LNG export projects are coming online soon. Kinder Morgan’s Elba Island (Georgia) and Cheniere’s Sabine Pass train 5 expected to start-up in December. LNG exports are our largest incremental demand market. 

The next major question will be where gas storage is after the winter and heading into spring and summer.

Stay tuned.