Key Drivers
- The falling of the year-over-year natural gas storage surplus
- Third warmest November in the past 70 years
- LNG exports hitting new record high level
- U.S natural gas supply production dropping back to 2018 levels
- What oil and natural gas price will stimulate investment in new drilling?
- Natural gas prices is the key driver of electric prices
Commentary
Was the very warm November the calm before the storm? As we enter December there’s a lot that we do know but there are still some things we don’t. We know that natural gas supplies have dropped substantially from a year ago at the same time overall demand is rising. One year ago natural gas production was about 95 bcf/day while today it’s approximately 85 bcf/day. Without new production coming online anytime soon, production levels are forecasted to drop to about 82 bcf/day by spring. Natural gas demand is just the opposite: U.S. LNG exports are hitting record levels at 11 bcf, exports to Mexico continues to rise, natural gas use in electric generation continues to be the primary fuel of choice and continues to replace coal fired plants, and also important, global demand for natural gas continues to increase. The United States is now the third largest LNG supplier in the world and positioned to rise on the charts. We send LNG to around 35 countries with Asia and Europe our biggest markets.
Two major questions face the energy markets in the coming months/years. The answers will have a strong impact on prices. The first major question is about the weather. Last winter was extremely mild. Will this winter and next winter be colder? Plus, how hot will next summer be? Will storage be able to reach nearly the 4 Tcf level like this past summer, or will the lack of supply cause storage to only fill up to about 3.2 Tcf? It won’t take much for this winter and next to be colder than last winter. If we exit winter with no year over year surplus and struggle next summer to fill storage past the 3.2 Tcf level, prices will rise sharply.
The second major question is at what price will oil and natural gas have to be to stimulate new drilling. While historically 70/bbl. is a good price to get the drilling rigs running, it’s no sure thing. U.S banks funded the first big wave of financing for the drilling over the past few years as new major Shale reserves were found and drilled. However, this time banks appear to be staying away from the high risk/reward and price volatility of oil and natural gas production. Who is going to fund the second wave? If there are fewer sources of funding and more competition for the funding as other opportunities exist like renewable energy sources will $70/bbl. be the entry point for funding new drilling or will it be higher? Natural gas prices will likely need to be near $3.50 to $4.50/MMBTU to stimulate drilling.
Overall the U.S has a widening natural gas supply and demand gap. That gap will grow wider as natural gas usage increases from cold weather in the winter and hot weather in the summer. The gap will grow wider as export demand grows. It will definitely widen as U.S. production keeps dropping and new drilling isn’t bringing new supplies to the market. November was so extremely warm and with the Thanksgiving holiday lowering demand even more it’s easy to not take the supply and demand gap seriously. The next 18 – 24 months will be very interesting to watch how much the gap widens, how high prices go and at what price point does new drilling begin.
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