This post by Jeff Bolyard, Vice President, Commodity Strategy, is featured in our recently released November 2021 Monthly Monitor, which includes articles and analysis for the natural gas, electric, crude oil, and sustainability markets. To read the full newsletter, click here. To sign up for the Monthly Monitor distribution list, click here.
In 2020, NYMEX monthly settlements averaged $2.077, the lowest average price for any calendar year in over two decades. The price was driven by several market conditions never seen in the energy market, including a pandemic that reduced demand worldwide, a crude oil war which temporarily plunged crude prices below $0 / barrel, and the turnback of a majority of U.S. based LNG exports last summer.
Then came 2021, where Winter Storm Uri pushed demand and prices to all-time highs in the spot market and underground storage levels flipped from a year-on-year surplus of 182 Bcf in January to a 255 Bcf deficit twelve weeks later. As the spring and summer months passed, the forward NYMEX slowly rose from the 2020 lows to an average of $2.69 in Q1 2021, $2.83 in Q2, and $4.01 in Q3. On October 27, the November 2021 contract settled at $6.202, the highest November contract final settlement price since 2008.
So, what will turn this bullish price trend around? One way is to lower demand, and one of the largest demand sectors for natural gas is power generation, which has used an average of 35% of all dry gas produced domestically so far this year.
For calendar year 2020, power plants across the U.S. generated a total of 3,572 TWh of electricity from the four primary fuel sources currently used. Of that, there was 792 TWh of power from coal, 469 TWh from solar and wind, 673 TWh from nuclear and 1,638 TWh from natural gas (statistics from Bloomberg NEF).
The pie chart below breaks down those four major fuel sources:
As the world transitions to a renewable energy economy, the European model–which is a few years ahead of the U.S.– projects that the first fuel to drop out of the power generation fuel mix will be coal. Current coal stockpiles available for this winter are 30% lower than last year, with Powder River Basin coal prices at 20-year highs–a strong signal that coal-fired generation may not be able to be relied upon this winter.
Absent the addition of significant renewable sources that are tied to batteries during periods of low wind and solar–which will not happen this winter or even next year–the currently available fuels to fill the transitional gap to meet existing and growing power demand are natural gas or nuclear generation.
So, is the $4-$6 /MMBtu natural gas pricing we are seeing this year just a short-term problem that will correct itself back down to the $2-$3 range we were comfortable with from 2011-2020? The answer depends on many variables, including how cold the upcoming winter will be and how quickly it arrives. In the meantime, a significant upside price risk will remain over the next 12-18 months under current market fundamentals, which could continue for some time.