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During Constellation’s July Energy Market Intel Webinar, principals from our Commodities Management Group (CMG) examined primary fundamentals driving the natural gas market and revisited the role of crude oil pricing on natural gas production. They also discussed the potential impact of trade policy changes on U.S. energy exports and domestic energy markets in the short and mid-term. Following are some key takeaways from this month’s webinar:
To date, Summer 2018 has been the hottest on record, and high temperatures have been concentrated in primary population centers. As such, many records for peak electric power load were also set this summer.
Year-over-year demand for natural gas-fired electric power generation has increased +14% due to these hot temperatures, and the trend should continue through the rest of July in Texas and the western U.S., two large gas-fired power markets. The Midwest is forecasted to be “normal” (based on 30-year average temperatures), and the eastern U.S. appears to be normal to slightly above normal through July. This should translate into continued higher-than-average natural gas demand.
So far, the tropics have been fairly quiet, but a “normal” 2018 hurricane season – 12 named storms with two to three storms becoming Category 2 hurricanes or larger – is expected. However, hurricane season is no longer considered a major threat to U.S. natural gas supply as only a small fraction of natural gas is currently produced offshore in the Gulf of Mexico.
Record production has been this year’s key U.S. natural gas market story. Production hit 81.2 Bcf/d in the first week of July, +9 Bcf/d from the same time last year. This steady increase in supply was the primary force keeping a lid on pricing during the first half of 2018. Higher prices for crude oil continue to play a role in bringing more “associated gas” (natural gas production associated with the production of crude oil) to the market. All things being equal, higher crude oil prices generally place some downward pressure on natural gas prices. A weak or falling crude oil market would be supportive of natural gas prices.
If record natural gas production is keeping a lid on natural gas prices, low storage inventories provide the floor. Natural gas storage inventories are 725 Bcf lower than the same period last year, a four-year low. Given that there is just three months remaining in the storage injection season, an additional 7 Bcf/d of gas is required, above the weekly average, to bring inventories to a level equal to five-year averages. Since this has not been happening, the expectation for inventories at the end of the injection season (October 31st) is a four-year low of 3.5 trillion cubic feet. This would create a bullish market feature for the fourth quarter.
Trade Policy News
Concerns over tariffs and trade policies have been front-and-center throughout 2018. The U.S. is a rising star in energy exportation and has been on track to become the world’s top energy-exporting nation over the next five years. The U.S. is the already the largest exporter of refined petroleum (gasoline, diesel, aviation jet, distillate) and propane, the second largest exporter of natural gas, and the sixth largest exporter of crude oil. U.S. energy exports have risen rapidly and represent over $200 billion annually, about 14% of total U.S. exports. Primary current and future customers for U.S. energy exports are China, greater Asia and Mexico, and these countries have been in the center of ongoing trade and tariff discussions. If implemented, retaliatory tariffs on U.S. energy products would likely come with some downward pressure on U.S. domestic markets in the near and mid-term.
Register today for our September Market Intel Webinar, scheduled for September 19, 2018 at 2:00 p.m. ET.
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