US Natural Gas Price Sinks Amid Mild Winter

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US Natural Gas Price Sinks Amid Mild Winter

The United States has seen a winter with warmer than average temperatures and, consequently, gas stocks have slumped back to their previous low level. Futures prices at the Henry Hub in February 2020 have fallen from $3 per million British thermal units from its peak of $4.80 in middle of November.

Gas stocks saw a large rally in the summer and autumn of 2020, but prices have fallen back to their original low – which has plagued the energy sector for the past three years. During the 2020/2020 cycle, consumption of energy was 6 per cent higher than average; however, since the milder winter set in four weeks ago, average prices were 4 per cent lower than usual.

A Matter Of Production

A surge in gas price from October to mid-November encouraged electricity producers to switch from gas to coal. Gas-fired generators were run for fewer hours in the fourth quarter and cheaper coal used instead, making low stores of gas go further.

The scarcity of gas stores was announced by the US Energy Information Administration, stating that the mid-December underground stock of gas was 20 per cent lower than the average for this time of year. However, this deficit was reduced to 14 per cent by the milder winter, as the capacity of gas generators were reduced.

The Influence Of Fund Managers

Back in October, US natural gas stocks were going into the winter with their lowest price for fifteen years; a small price rise was truncated by the high probability of an El Nino event, which causes the West Coast of the United States to experience a milder than average winter.

Hedge fund managers seemed to have been savvy about the predictions of a milder winter, further exacerbating the price drop. Between July and mid-November, hedge fund managers were the net buyers of futures and options, especially gas stocks.

However, as electricity produced by gas slowed and with US Federal predictions about a mild winter continuing, fund managers became net sellers – further plunging gas stocks to their new low.

US Natural Gas Prices Continue Freefall This Winter

After the lowest summer U.S. natural gas prices since 1998, the market has continued to fall this winter 2020. The cold weather has simply not arrived. In fact, after the second warmest November on record, nine of the ten weeks ending November 23 to January 25 were all “warmer” than normal, as recorded by Heating Degree Days. In turn, the storage withdrawals to meet winter’s collision of heating and power demand have been much lower than normal (see Figure). By the close of January, U.S. gas inventories stood almost 25 percent above the same time last year and 10 percent above the five-year average. On January 21, Henry Hub spot prices crashed below $2 per MMBtu for the first time since the end of May 2020.

Beyond just very mild winter weather, U.S. gas prices have remained at historic lows due to record domestic supply that seemingly will not stop. After rising some 13-15 percent in 2020 output rose another 10-12 percent in 2020 to almost 93 Bcf/d. This has led to a 3-4 Bcf/d oversupply in terms of U.S. gas production rising above consumption. Not even a booming export complex that in 2020 averaged 5.8 Bcf/d of LNG feedgas and 5.1 Bcf/d of piped supply to Mexico has been able to slow the fall in pricing.

The main problem for U.S. overproduction has been that activity in the Permian basin – a West Texas play that now accounts for 20 percent of the country’s gas supply – is not being driven by price signals. The light, tight oil revolution in the Permian continues to yield an oversupply of basically “free” associated gas. So much so that prices at the local Waha gas hub have often been drifting into the negatives, meaning that producers are actually paying companies to take the gas away to allow for more crude extraction.

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Yet, with such extreme low prices combined with some well freeze-offs, U.S. gas production dipped to 89 Bcf/d to close January, the lowest since summer. For sure, the key gas market question this year will not just be the expanding LNG export boom but also domestic production. The obvious assumption is that production growth will slow down, but the bigger question remains: will output actually decline in the absolute sense?

For 2020, the gas rig count fell 75 to 125. With many producers reporting CAPEX declines of 50 percent or more, 2020 will be the industry’s biggest test since the 2020 downturn. EIA’s latest forecast has Henry Hub averaging $2.42 this year, down from the $2.66 price in 2020. And as hedged production programs begin to fade out this year, 2021 could see an even bigger slowdown in output.

US Natural Gas Weather Forecast

NatGasWeather.com provides daily weather forecasts focused on the nat gas industry, specifically how coming weather patterns will affect heating demand and potentially prices. You will also receive hurricane, summer, and winter outlooks, as well as updates on El Nino/La Nina.
NatGasWeather.com offers daily weather forecasts with the focus on weather conditions that will drive nat gas and heating demand over the coming 2-3 weeks. It is typically 4 pages in length with selected images included and is followed with a Mid-Day update issued after fresh forecast data comes in. In addition, you will receive our exclusive Hurricane and Summer Outlooks as well as the Winter Outlook and Critical Weather Alerts for weather conditions that could cause big spikes in nat gas and electricity demand. The cost of the monthly subscription is $49 for individual investors, which is less than the price of a few ticks move in the futures markets. For companies wishing to subscribe, the price is $249 for up to 8 employees receiving all subscription benefits. If you are not satisfied at any time you can cancel without fee. We also offer Live HDD/CDD weather model statistics as a separate service. For more information click here.

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