This post by Jeff Bolyard, Principal, Energy Supply Advisory, is featured in our recently released August 2022 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.
The August natural gas NYMEX had a final settlement of $8.687/MMBtu on July 27, placing the 2022 year-to-date (YTD) average at $6.45. This average is $2.61/MMBtu higher than the 2021 average of $3.841 and over 3x the average in 2020.
Regional spot pricing in July has seen some extreme price spikes as well, with prices in New England reaching $23 on 7/21 and Southern Natural increasing to $13.57 on July 27, while the Florida Gas City Gates averaged $12.15 per MMBtu in July. So, with the extended downtime caused by last month’s Freeport LNG fire keeping as much as 2 Bcf/day seeking a home in U.S. markets for most of June and July, why the big runup in natural gas futures and spot pricing?
The most likely reason appears to be power generators increasingly relying on natural gas to meet power demand. However, the root cause began with several inputs starting the extreme heat patterns experienced by a large percentage of the U.S. in July, which was then compounded by periods of intermittent wind. Add to that the ongoing struggles of electric utilities to rebuild stockpiles of coal – at a decade low level for this time of year – and what we have is growing peak power demand with little ability for the market to draw on fuels other than natural gas.
The Bloomberg chart below shows the natural gas demand for power generation YTD (red line) vs. the 5-year historical average (green line). As you can see, demand for gas-fired generation is significantly up this year, averaging a surprising 4.01 Bcf per day more in July this year vs. the 5-year average. A new single-day peak was also hit on July 21, when 48.89 Bcf of natural gas was used to generate power and represented 50.5% of dry gas production in the lower 48 states that same day.
This increased demand seems to have offset much of the excess supply created by the Freeport LNG fire. Supporting evidence of this theory was provided by the EIA’s most recent storage report, which indicated a very bullish 32 Bcf injection last week. This same report included a WITHDRAWAL out of storage in the South Central region of 16 Bcf and a miniscule injection of just 1 Bcf in the Mountain region.
While a somewhat “perfect storm” has evolved over time to get us to the current high-price, supply- short energy environment, another perfect storm may be required to get us out. Expect extreme volatility with a higher price floor to remain until concerns of supply/demand balances and infrastructure limitations can be eased. While we’re making a wish list, I would also like to add “making progress towards a long-term energy policy” to the mix.
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