Key Wholesale Market Drivers

1. Colder than normal temperatures through at least mid-November
2. NOAA predicts the Midwest and Northeast to end the 2019/2020 winter season slightly warmer & wetter than normal
3. The 2019 natural gas storage injection season showed many weeks of above average injections
4. Current natural gas storage levels has risen to match the past 5 year average
5. Natural gas NYMEX went up from $2.25/MMBTU October 23rd to $2.639/MMBTU in three days.  Trading at $2.71/MMBTU at print time.

 Commentary

This winter the Pacific weather patterns called El Nino and La Nino shouldn’t effect our weather.  However, there are three key weather factors that will affect our temperature.  The first two are the Alaskan Ridge and Greenland Ridge, which are high pressure systems over Alaska and Greenland that help push cold air from Canada into the Midwest and northeast United States. The third is the Polar Vortex, which is a jet stream circling the North Pole that periodically gets pushed out of shape and descends into the U.S.

Natural gas production throughout 2019 has been very strong and has often hit new weekly high level records.  In October, however, U.S. production leveled out and actually dipped the tiniest bit.  A very warm September followed by a seasonal October has helped push storage levels in the U.S  back up to the meet the 5 year average after trailing the 5 year average the past couple of years.  We expect the final storage level heading into the winter withdrawal season to end slightly above the 5 year average.  That’s the bearish news.  Now for the more bullish news.  Since the beginning of 2019 the natural gas drilling rig count has dropped about 29% including horizontal drilling rigs.  We’ve also seen the inventory of wells drilled but uncompleted drop.  This points to the possibility that investors are reducing their investment dollar at current natural gas prices.  While it is true that drilling efficiencies and completing wells previously drilled but uncompleted is keeping natural gas production strong in the short-term, is it masking a production question mark 6 – 12 months from now?

In 2018 natural gas demand kept pace with natural gas production in the U.S.  In 2019 natural gas demand couldn’t keep pace with even higher natural gas production.  However, LNG exports continues to grow, natural gas use in electric generation continues to grow, U. S. consumer demand continues to grow and exports to Mexico is staying strong.  In 2020, can U.S production keep pace or exceed demand like in 2019 or will demand keep pace like 2018?  Here’s the worst case scenario for natural gas and electric consumers: We have periods of extreme cold that lasts well into March digging deeply into the natural gas storage levels.  This is followed by a hot summer gobbling up huge amounts of natural gas for electric generation.  LNG stays strong as does the U.S. economy.  Meanwhile, natural gas production slides back down a little to 2018 levels.  This would likely result is much higher natural gas and electric prices in 2020 and beyond.
It is true that we could have a warmer than normal winter and prices in the Spring could be similar.  However, we don’t believe consumers should get trapped by eternal optimism on prices essentially subjecting them to more price risk.  Energy consumers need to weigh the pros and cons of waiting to buy natural gas and electric in a potentially rising market and how higher prices could affect their energy budgets.  At RD Energy we are available to help talk through the pros and cons and help your company build a stronger, more complete and more transparent energy buying strategy.  Please contact us to start a discussion.