Shale’s Low Prices Will Have US Natural Gas Electricity Breaking Records Again This Summer

Shale’s Low Prices Will Have US Natural Gas Electricity Breaking Records Again This Summer
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In 2019, U.S. natural gas easily led commodities with prices dropping by nearly 30% (e.g., Zinc was second, down 5%). Importantly, this drastic fall in the cost of gas came even with unprecedented use. At 86 Bcf/d, “U.S. natural gas consumption sets new record in 2019.” Now, a mild 2019-2020 winter has continued to plunge gas prices to historic lows. Since Thanksgiving, 14 of the past 16 weeks have been “warmer” than normal, per Heating Degree Days. From November 1 through February 28, gas used for heating was almost 10% less that what it was over the same period last winter (Figure 1).

So far for March, Res/Comm (i.e., heating) demand has been just 32 Bcf/d, down a hefty 42% from the 55 Bcf/d we saw for the first week of March last year. Further, thanks to the “shale revolution,” U.S. gas production has been smashing records never dreamed imaginable, up ~70% since 2008. And over the past month, the coronavirus outbreak has rattled commodity markets here and around the world.

Data source: EIA; JTC

In turn, U.S. natural gas prices have collapsed to a four-year low (Figure 2). Such a decline for this time of year is made even more noteworthy since winter is the high demand season, when electricity needs collide with heating to spike the market. Gas leads and generates nearly 40% of U.S. power, while gas also heats 50% of American homes and millions of commercial buildings.

Data source: EIA; JTC

As we quickly advance into spring and then summer, U.S. gas storage inventories are now almost 50% above where they were this time last year. The projected withdrawals for the next three weeks average a combined 60% less than normal, bearishly adding another 120 Bcf to our already 176 Bcf surplus to the five-year average. In fact, we are now slated to end the winter withdrawal heating season at the close of March with a whopping 1,935 Bcf in the ground: “EIA forecasts natural gas inventories will reach record levels later this year.”

In addition, sunken global gas prices are starting to shut-in our LNG exports, an obviously bearish factor that could worsen by summer. Cheniere Energy recently announced that one of its buyers had canceled two of LNG cargoes scheduled for April delivery. LNG is an essential relief valve for a U.S. gas industry that desperately seeks higher prices. Fewer shipments abroad will further burden a domestic market that already has a 3-5% surplus.

Yet, the collapse in U.S. natural gas prices is setting up another record for summer gas demand. As coal and nuclear plants continue to exit our electricity system, and natural intermittency often makes wind and solar unavailable, the unique faculties of gas are becoming even more critical in the hotter months. Wind, for instance, struggles in heat waves since there is little to no breeze: “Texas’ Impending Reliability Issues With Wind Power.”

As for our other sources of power, the U.S. coal power fleet over the past decade has lost nearly 30% of its capacity, now standing at ~230,000 megawatts (MW). Last year alone, 14,000 MW of coal capacity was retired. Stagnated for many decades, some 35% of U.S. nuclear plants are now at risk of early retirement, perhaps over the next decade. Solar is clearly more limited geographically than some care to admit, currently generating just 2% of U.S. electricity: “Keeping California's Great Solar Boom In Perspective.”

All of this inevitably means more natural gas. This is particularly true since gas is already favored because it has lower greenhouse gas emissions and retains the flexibility to backup intermittent wind and solar power. Such a low and stably priced environment is locking in more gas infrastructure and demand. Given its rising 45% share of total U.S. power generation capacity, the reality is that gas prices could triple and demand could not fall very much. Electricity is the ultimate indispensable form of energy: “it cannot not be used.”

As for this summer, to envision what could be for U.S. gas prices and gas electricity, all we have to do is look at what happened last year. At this time last year, even when gas prices were much higher and storage was much lower, we still ended up with the lowest summer gas prices since 1998. Henry Hub averaged just $2.41 from May through August. Gas used for power generation averaged a record 38 Bcf/d (for reference, it is now 27 Bcf/d).

Indeed, for market bulls, such low prices today will ignite more demand while also starting to pull back the record production that we have had for over a decade. In fact, less CAPEX and fewer applications for drilling permits have become the norm for now. And with production hedging programs fading out, this should continue on through 2021. After record growth of 13-15% in 2018 and 10-12% in 2019, U.S. gas output this year could rise by just 1-3%.

But do not expect U.S. gas production to drop much. Gas is just too integral and the industry has simply become too efficient. And higher oil prices (if they do come) would expand the oil-drilling boom in the Permian basin in West Texas. This would bring a flood of the “associated gas” that comes along with crude as a free by-product. While yielding 40% of U.S. crude oil, the Permian accounts for 20% of our natural gas supply – despite not having a single gas-directed rig.

The U.S. gas industry therefore should be gearing up for another record for demand this summer. Gas generated 40-45% of U.S. electricity in summer 2019, so a 47-52% share this summer seems in the cards. The shale revolution has installed a perpetually low cost environment for gas. The U.S. Department of Energy (DOE) now expects gas to stay below $3.70 through 2050. For reference, pre-shale from 2000-2008, gas prices averaged over $6.00.

For the whole of 2020, DOE expects prices to average just $2.20, or right where they have been this winter. Even that though now requires bullish action: on Friday, the prompt-month April 2020 contract settled at $1.70, as compared to $2.65 this time last year.

In our increasingly “gas and renewables only” electricity future, no wonder then that natural gas will continue to dominate. Such low prices for gas will be an enormous challenge for renewables and their required battery systems to compete against. Not surprisingly, DOE has gas extending its primary position even further by adding 235,000 MW of new capacity in the coming decades, eight times more than wind and 35% more than solar.

Jude Clemente is Editor at RealClearEnergy. 

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