Summer Energy Outlook 2019: Supply & Demand

This video is a recorded excerpt from a live webinar on April 16, 2019.

Natural gas production levels have seen slower growth in 2019 than at any time in the previous two years. The exponential growth period we saw in 2017 and 2018 - when increasingly more natural gas was being produced each month - appears to have subsided. In fact, it is difficult to determine whether levels are growing at all this year or simply holding steady within a range of fluctuation. Is this because of maintenance, or are there other forces at play?

Before we can answer that, we need to look at demand. Across the board, demand for natural gas is up; power burn, exports to Mexico and Liquefied Natural Gas have all increased substantially compared to the same time last year. LNG in particular has grown by more than 50 percent compared to 2018, and Mexico’s appetite for natural gas suggests that we could export much more across the border if current pipeline projects are completed on schedule. Given all this, Direct Energy Business experts estimate that demand will grow, year-over-year, by about two billion cubic feet per day with respect to both our exports to Mexico and LNG feedgas and about 1 Bcf/d when it comes to power burn. Furthermore, these are conservative estimates; actual numbers could easily surpass these if current trends hold true.

So: what will happen if supply stagnates while demand continues to climb?

The Econ 101 answer is, obviously, that prices will rise. Thankfully, actual outcomes are more complex. In the eastern U.S., natural gas basis prices are already on the rise as markets begin to incorporate the demand/supply imbalance. High power burn rates in the Northeast and Midwest are also playing a role in keeping natural gas storage levels below their five-year average, which is usually associated with a risk factors and, in turn, higher prices. But there are mitigating factors to think about, too.

For instance, new natural gas power plants are much more efficient than old ones. These new plants require less gas to generate the same amount of power compared to older plants, which could temper demand somewhat. Additionally, they can run 24/7, much like nuclear plants, which means that they will produce much more power over time compared to the plants they are replacing. The good news, then, is that as these new facilities come online, they may have a tempering effect on prices.

The California Outlook

California is dealing with pipeline outages, which have hampered sendout capacity. Low storage levels are also complicating the price picture for buyers. Even worse, the Aliso Canyon gas storage facility could be shut down permanently, which would limit southern California’s storage capacity significantly. This all means that there is a wide gap between the “best case” and “worst case” scenario for the region; unfortunately, it is too early to tell which way the situation will go.

In SoCal Citygate specifically, prices have been (to put it simply) all over the place. The basis price for May 2019 futures has gone up, then down, then up again and down again in the space of six months, and shows no signs of stabilizing. Perhaps renewables could soften the blow, or the state’s pipeline and storage issues could subside. Until something changes, however this market will be difficult to predict.

The Texas Outlook

Texas has the distinction of being one of the country’s leaders in wind energy. On the ERCOT grid, wind will account for 23.4 percent of generation capacity in 2019, overtaking coal. Reserve margins, however, are still running at a historically low 7.4 percent, which is particularly risky considering the region’s growing electricity demand.

NYMEX

Not since June of 2016 has the price of natural gas spot contracts on NYMEX dipped below $2.50 per million Btu. It has tested this threshold repeatedly, but the support has held for almost three years, perhaps due to the changing demand factors previously discussed. Additionally, some observers have noted that “backwardation” — the phenomenon in which futures contracts trade at lower prices than expected spot value — for natural gas futures may be coming to an end.

Does this spell the end for our current buyer’s market? Not necessarily, but some buyers might begin to plan for contango market conditions instead.