Prices for NYMEX Henry Hub Natural Gas continue to increase, just as they were increasing before the pandemic shut down at the beginning of last year. Prices for natural gas for the prompt month, and for the next few years, are also following the same trend. The distinct increases in prices for the NYMEX can be observed in Figure 1.
Figure 2 below demonstrates the forward curve for NYMEX natural gas and how unsteady the past three months have been. The black curve shows the curve for the date of June 25th, and the blue curve shows the same forward price curve on the 18th of March. Note how the prices have surged across all years up until 2031, with the most pronounced price change at the front end, marking years 2022 and 2023.
What is causing the increase in the natural gas prices? It is easy to blame inflation, considering the price of many essential and material things has gone up within the last year. Inflation may be a factor, but it’s only part of the reason. This bull market in the natural gas industry echoes trends that were already in place even before the pandemic started. In December of 2019, natural gas production in the U.S. was at its highest level ever (97 Bcf/day). Before the start of the pandemic, natural gas production reduced somewhat because of the economic recession and the detrimental effects of oilfield drilling economics that followed. Note that the prices on crude oil were negative on April 20, 2020. As of today, production of natural gas is flourishing after the catastrophic outages caused by the extreme weather in February 2021.
Figure 3 displays the number rigs that drill natural gas (blue line) compared to the actual amount of natural gas produced daily in the U.S. The chart shows the consistent recovery in rig count during the last year. The brown line shows the gas production rates and how they stay strong and steady even if the EIA’s Short-Term Energy Outlook doesn’t foresee the return to pre-pandemic levels anytime soon.
When evaluating the natural gas market, it is important to also consider how much gas is in storage. There is a notable underground storage facility in the U.S. Over the past few months, gas manufacturers have been pumping gas into these storage units to arrange and prepare for the high demand next winter. Figure 4 shows the current levels (blue line) and how they are within the 5-year range, but also note they are below the 5-year midpoint (black line) and considerably below the levels from a year ago. Uri and the cold weather caused the storage to drop down significantly.
As of today, the natural gas production is normal and the storage is just below normal levels. These components explain why there has been a fast increase in prices for natural gas within the last three months. Other factors to be considered are near-term weather conditions and the worldwide demand for natural gas.
In Texas, ERCOT began to issue word on June 13, warning clients of possible shortages in electricity because of high electricity demand and the air conditioning load, which they expect will reach record levels. A source announced that natural gas supply needed to generate electricity in Texas was an average of 5.8 billion cubic feet per day (Bcf/d) for that one week, resulting in 1.0 Bcf/d above the previous week. At the Houston Ship Channel gas area, prices rose on June 9th to 18c from $3.01/MMBtu to $3.19 on the 16th of the month. At the same time at the Henry Hub, prices also rose 7c from $3.10/MMBtu to $3.17/MMBtu. Drought and extreme weather in the west of the country have also caused additional demand for natural gas because of the scarce output from hydroelectric dams in the area. These weather conditions have been major elements driving the bull market, which many believe will not change in the near future.
Demand for the U.S. to produce natural gas is also increasing. The EIA stated on June 17th, that exports of natural gas to Mexico have increased weekly 4.6% to 6.8 Bcf/d, setting a new average record. Gradual capacity for pipelines continues to grow south of the Texas border in northern regions in Mexico where the area is largely industrialized and has high natural gas demand. Markets in Asia and Europe are also eager for natural gas. The pandemic caused chaos and dismantled the global LNG market as the energy demand globally was severely imbalanced in countries relying on importation of natural gas. Price spreads crumbled to a point that the marginal cost was way below the usual. This upside-down economics led to massive cancellations of purchases in European and Asian countries. Due to the cancellations, Europe currently has a low level of natural gas in storage for this time of year. Over the next few months, LNG exports will continue to increase and remain high as countries begin to recover and reopen their economies.
Natural gas production has been slowly recovering even after the industry was at its lowest spot in the last 25 years. This, along with warmer weather, higher demand and recovering pandemic economies, have all contributed to the near-term prices increase. Gas price lowering may be a thing of the past, as the current market looks to be headed in the opposite direction.
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