US natural gas market suggests a spectacular comeback of prices (Mihai Nichişoiu, Tradeville)

Mihai Nichisoiu – Senior Broker Tradeville

Apparently, not much is happening. In the US, the natural gas quotes in the spot market are now around $ 3 per MMBtu, lower by about 75% compared to what we saw lessc than a decade ago. However, factors both circumstantial and structural indicate the possibility of a sudden and strong positive corrections in the next few months.

There are two important sources of demand for natural gas in the US: industrial consumption (usually constant) and consumer consumption generated by the need for climatization via air conditioning or heating. Due to a very strong El Niño, last winter was the warmest in the last half century and, for a large part of US territory, the need for heating was insignificant. The phenomenon has encouraged a huge depreciation in the prices of natural gas. This spring, quotes fell below $ 2 per MMBtu, reaching new lows in the last decade.

The evolution of the quotes is heavily dependent on weather conditions and it is entirely credible that the approaching winter will be more severe than what we had in the last few years. For now, predictions like this are not so numerous – one comes from Judah Cohen, a renowned climatologist at the Massachusetts Institute of Technology, who supports, based on correlations developed over a period of 17 years, that the winter about to begin will be extremely cold and extremely long.

But it’s not just about the hope of a harsher winter. Although they are not yet in public attention, some structural realities have changed dramatically in 2016. The total stocks are still at a record high, over 4,000 Bcf, but the dynamic is interesting: stocks are only 1% higher than last year, and only 6% higher than the average in 2011-2015. Because of the severe and widespread crisis the US energy sector felt after 2014, in the US there are now around 80 natural gas wells in operation, a record low. Eight years ago, there were about two thousand, a record high.

And this is happening, in the same time when the pressures that should generate an increase in demand are growing. Two decades ago, the energy production in the US was using about five times more coal than natural gas. Now the two sources are close to parity. This summer, the consumption of natural gas for electricity production reached a record high, 9% higher than the same period last year. In parallel, however, the transport of coal in the US declined by 25% since January.

It is equally true that America holds enormous reserves of natural gas, enough to cover a century of consumption if demand would linger at current parameters. And the revolutionary technologies of “fracking” developed a decade ago make huge reserves of natural gas to be much more affordable now.

However, losing almost three quarters of its value over the past eight years, it is not as if the market had not already integrated a negative imbalance between supply and demand. Nobody is prepared now for an appreciation in gas quotes. Still, at the beginning of this year, no one was prepared for any appreciation in oil prices – and yet, they have doubled almost instantly.

In the US natural gas market, the assumptions which investors and companies have based on in the last decade will be tested in the next few months. It is possible and it is becoming more likely the lows we have seen this spring to have been more important than we imagine now. And the market may violently recalibrate towards significantly higher price levels than the current ones, in the approaching winter.


The full version of this article can be read in printed edition of Magazine, issued in December 2016.

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