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Energy Market Update: April 3, 2019

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Why does U.S. natural gas consumption fluctuate so much? Gas demand from the power sector is experiencing a boom; not only are we seeing higher highs, but also higher lows. In other words, demand is up across the board. How will prices respond? Direct Energy Business Strategist Tim Bigler offers his two cents below:

The Storage Factor

It’s not news that natural gas storage levels are currently low. Depending on the region in question, storage capacity utilization levels are hovering in the 20-30 percent range, with only a few deep-southern states and Texas exhibiting >30 percent utilization. Moreover, the Northeast and Midwest are demonstrating even higher demand for natural gas in 2019 than they did in 2018, potentially thanks to coal and nuclear plant closings. As a result, storage capacity utilization in the Midwest and East have sunk to to almost-unheard-of lows of 21 and 23 percent, respectively.

The Good News

This high-demand narrative may sound like a recipe for sky-high prices. However, it is also clear that natural gas power facilities today are operating at effective heat rate levels of around 6,800 BTUs per kWh, which represents a tremendous improvement from the levels seen in previous years (not to mention those achievable by coal plants). These plants also run around-the-clock. So, if the price of natural gas can remain above a theoretical $2.50 price support, the improved heat rate efficiency we’re seeing could mean a $21/MWh price for electricity, which is lower than we might expect given our current low storage levels and high demand factors.

What reason is there to think that a $2.50 support is realistic? For starters, Henry Hub spot contracts have not traded below that price in over 30 months. Additionally, LNG exports and exports to Mexico are on the rise, fueling gas-on-gas competition between exporters and the power sector. The bottom line is that while a hot summer could drive demand from the power sector (and, consequently, natural gas prices in general) higher, other factors like efficiency improvements, storage levels, and exports could influence prices as well.

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Posted: April 03, 2019