May 2019 Energy Update
Key Drivers
- Continued growth in U.S. natural gas production
- Abnormally warm April 2019 in the Midwest
- Continued growth in natural gas fired electric generation
- Buyers of LNG force change in the pricing model
Commentary
April 2018 was much colder than normal, there was a robust economy, strong LNG exports, growing Mexico gas exports, growth in natural gas fired generation and a natural gas storage deficit in the U.S. All of this helped natural gas demand keep pace with growing natural gas production during 2018. April 2019 is proving to be much warmer than normal taking away a lot of the shoulder season natural gas demand. This means that the storage deficit heading into summer will be minimal. Natural gas production growth in the U.S. continues to rise to new levels. The first couple of weeks in May might see some of the lowest short-term natural gas prices experienced in several years.
Natural gas production continues to grow. In April 2018 U.S. NG production was around 81 bcf/day. In April 2019 NG production is more like 89 bcf/day. It is expected to rise to about 93 bcf/day by the end of 2019. Natural gas demand the rest of 2019 will be driven by three primary things: AC demand, natural gas’s share of the power generation supply mix versus coal, and lastly, LNG exports. The manufacturing strength, Mexico exports and U.S. storage demand will play a role in demand as well. LNG exports weakened lately as market selling prices fell in Asia, weakening LNG demand and making LNG more of a Buyer’s market. The question now is can natural gas demand grow and keep up with supply through 2019.
Traditionally LNG buy-sell agreements were tilted in favor of the seller. They were long-term and tied to oil prices with the LNG source linked to dedicated supply sources by Buyer contract. Due to the global oversupply of LNG, Buyers of LNG are demanding and getting more both short-term and long-term contracts with flexible pricing features and flexible delivery terms. Many LNG producers have natural gas supply sources not only in the U.S. but in various locations around the world. This portfolio of supply sources is helping producers meet this new LNG short-term supply demand requirement and allows them to streamline delivery costs so they have the flexibility they need to meet the new short-term price demand. LNG is still seeing long-term buy-sell agreements taking place, but most are now sourced using the portfolio of supply approach rather than the dedicated supply source approach allowing more flexibility in cost to the Buyer while allowing the Producer more flexibility in how and where to source the supply to achieve the lowest delivery cost.