During the worst public health crisis in many decades, natural gas prices in the United States were low and stable from January to the end of July. For the first half of this year, prices were just $ 1.81 per MMBtu, their lowest since at least 1989. But unpredictably, August turned out to be a much different story. During the month, prices increased by almost 45%. We are now seeing the highest prices since mid-November – seemingly out of nowhere.
Analysts are scrambling to describe what happened in August to make gas prices soar. But neither the technical aspects nor the fundamentals clearly explain such a leap. The weather was not bullish and the gas storage overflowed. At 3,420 billion cubic feet, we are now 20% above the levels of a year ago and 15% above the five-year average. Gas production in the United States, however, has been largely stable. August production was 86-87 Bcf / d, down from the level of 93-94 Bcf / d we were at before the pandemic. And last week Hurricane Laura locked up “82% of oil, 59% of natural gas production in the Gulf of Mexico in the United States”Therefore national production plunged to 85 Gcf / d.
But still, especially as the shale era since 2008 has moved our production areas away from the vulnerable Gulf of Mexico to interior shale areas like the Appalachians and Permian basins, hurricanes are expected to be mostly bearish events. They reduce the demand for gas by reducing the need for electricity and blocking exports. In particular, the southeast and southwest regions have installed huge coal-gas fuel changes. Florida, for example, has waste gas to generate 76% of its electricity in the first half of 2020. Last week, US LNG exports were halted by Hurricane Laura, as feed gas demand rose from 5.2 Bcf / d to 2.0 Bcf from August 22 to 27.
We all knew that gas prices had fallen unsustainably in the first seven months of 2020, generally in the extremely low range of $ 1.60 to $ 1.90. This is especially true as natural gas is poised to surpass oil and become our most vital source of energy – possibly over the next five to seven years. Thanks to the ongoing pandemic, gas consumption in the United States could be classified as “surprisingly high and comparable to levels from a year ago.” In fact, we set a gas-fired electricity production record in July, one day reaching a huge 47 Gcf / d.
The most bearish factor for the gas market through COVID-19 has been the huge drop in US LNG exports, which boomed around 9.6 Bcf / d in late January to a spiral to ~ 3.3 Bcf / d for July – driven by low prices and global demand. Last week, however, pipeline gas exports from the United States to Mexico hit record highs of 6.7 Bcf / d. In total, gas consumption in the United States for the three main sectors of electricity, industry and res / com was 73 to 75 Gcf / d in August, where it was in July.
Looking ahead, the US Energy Information Administration To natural gas prices average $ 2.11 this year and $ 3.25 for 2021. The main explanation for such a jump is that the Authority expects production to continue to decline, averaging only 84 Bcf / d next year. Not me. I see higher prices for oil and gas driving up supply, reaching over 90 Bcf / d in just a few months. We will need the new production as winter demand increases 40-60% from summer, not to mention export prospects which improve a lot.
But with the RSI hitting 73 on Friday, an overbought market is already starting to push prices down a bit, down 8% this week to $ 2.45 this morning. And the temperatures are getting colder. Stay tuned, as we saw in 2018 (almost $ 5.00) and 2019 (almost $ 4.00) November is that mountain on the horizon. November is the key month for gas prices to really rise – with a cold and early start to winter likely to spook the market.