February 2019 Energy Update

Key Data

1. January 2019 NYMEX closed at $3.642/MMBT.  February recently closed at $2.95/MMBTU
2. March  – October 2018 NYMEX averaged $2.845/MMBTU.  March – October 2

   019 is trading at an average of $2.893/MMBTU

3. NYMEX calendar 2020 is trading at an average of $2.769/MMBTU.  NYMEX calendar 2021 is trading at an average of $2.64/MMBTU

Commentary

It’s important to understand why the U.S. recently experienced a “polar vortex” event.  It is rare for  the vortex to descend south from over the Arctic.  Since the Arctic has experienced the greatest rise in temperatures compared to anywhere on the planet, the jet stream holding the polar vortex in place has weakened.  For the 3^rd time in the past 6 years the jet stream has been too weak to hold it in place resulting in extreme cold events in the Midwest and Northeast U.S.  This same jet stream weakening is increasing the frequency, strength and duration of extreme weather events.

We have talked since the end of the 2017/2018 winter about the 700 bcf natural gas storage deficit.  The concern has been about having such a high storage deficit coupled with the fact that even with record natural gas production in the summer of 2018 the storage deficit wasn’t reduced by the start of the 2018/2019 winter season.  During the summer of 2018 natural gas demand growth matched natural gas production growth.  However, the storage deficit was pretty much wiped out this past December and early January when above normal temperatures fooled predictions.  We will see the deficit grow again during the last half of January and February, since February 2018 was extremely warm.  If March 2019 warms up as early forecasts predict, any storage deficit remaining at the end of the 2019 winter season may be minimal.

The biggest energy story of 2019 won’t be the polar vortex hitting the U.S. or the storage deficit.  It will be U.S. natural gas production growth versus natural gas demand growth.  2018 reflected new natural gas production records nearly every month.  However, natural gas demand in the U.S. kept pace.  It’s expected that more natural gas production records will be hit in 2019.  Will natural gas demand keep pace?  Will the high price of oil keep drilling robust and with it new natural gas supplies as a by-product.  If oil prices were to fall sharply, would drilling and consequently natural gas supply growth drop?  Highly likely.  Meanwhile, natural gas demand is still increasing.  Another large batch of coal power plants are retiring in 2019 while more natural gas fired generation plants are coming online.  LNG export capacity is doubling with 4 new export terminals about ready for

 service.  Plus natural gas exports to Mexico continues to increase.  Two key demand questions are left to be answered: will the summer of 2019 have extreme heat in the Midwest and Northeast that raises natural gas demand exponentially and will the continuing U.S/China trade war harm the demand for U.S. LNG supplies?  The natural gas supply and demand balance is tight and can easily be effected by a number of factors on either side of the scales.  This current tight supply/demand balance 

will likely result in periods of stable prices followed by price volatility.