October 21, 2020

Winter Gas Price Risk – Long Term Pricing Impacts Driven by Near Term Risks

By Keith Hamilton Manager, Client Services - Supply Advisory

Reduced production rates compounded by a potential of normal winter demand could snowball to increase natural gas pricing over the course of the next year.

As the shoulder season draws to a close and storage inventories are poised to post near historic levels, the forward NYMEX futures have been gaining ground at rates that have not been seen since November of 2018. Storage inventories will likely match or exceed the second highest ending inventory recorded at 4.009 Tcf in November 2015. The bullish push has been primarily centered around waning production numbers that have resulted from the oversupplied and depressed NYMEX market as we head into the unknown of the winter demand season. Accelerated with the lack of heating demand over the course of the past winter and the downward market that we have experienced since November of 2019, has had a significant impact to the financial status of natural gas production companies. This has led to the curtailment of production driven by economic impact, lack of profitability, and waning access to bank financing.

Current gas production forecasts include:

  • Dry gas forecasted at 87.23 Bcf/d for the month of October, according to Bentek projections.
    • In comparison, the 2019 average production rate was 91.45 Bcf/d with 2020 forecasted to end at an average production rate of 88.97 Bcf/d.
  • Looking forward to 2021, it is forecasted that dry gas production will decline to an average of 87.6 Bcf/d.
    • Total natural gas supply is forecasted to average 92.6 Bcf/d in 2021, a 0.8 Bcf/day reduction from 2020 and 3.4 Bcf/d reduction from 2019.

So, what does this mean for the future of natural gas pricing? With the current long-term temperature outlook calling for higher probabilities of warmer than normal weather, why is the market gaining with significant storage inventories in reserve?

The concern is not necessarily for the near term, but the longer-term natural gas market. According to Bloomberg NEF, current forecasts are calling for an end of winter inventory of 1.2 Tcf. This would be in line with the end of winter 2018-2019. The concern over reduced production levels is magnified looking to next year’s summer injection season, as the decline in production and supply will stall the storage build. Estimates for next fall’s end of injection inventories are in the area of 2.8 Tcf, which would be the lowest start of winter storage inventory since the fall of 2000.

Taking into consideration the current milder winter weather forecast, forecasted production and demand dynamics, and the threat of a normal winter weather demand, the NYMEX futures market has gained strength with cautious anticipation of a tighter market. However, any indications of normal levels of heating demand or cold winter temperatures, such as demand driving cold snaps experienced in past years’ occurrences of polar vortexes, have significant long term potential to drive the futures market pricing significantly higher well into the futures curves. Proactive hedging strategy to protect future natural gas expenditures should be considered. Contact Edison Energy today to learn more, and help mitigate winter price risk.

Edison is hosting a webinar on Tuesday October 27th that goes into more detail on some of the topics mentioned in this article. Click here to register!