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Natural gas has rallied this year, with summer heat and tight U.S. supplies of the fuel in storage lifting prices to their highest levels in 2½ years—and setting the market up for a potential shortage for the winter.
Natural gas has found strength not only from below-normal levels of storage, but also pipeline issues that limited production recently, says Gary Cunningham, director of market research at Tradition Energy.
For the week ended July 9, working gas in U.S. storage was at 2.629 trillion cubic feet, down 543 billion cubic feet from the same time last year and 189 billion cubic feet below the five-year average, according to the Energy Information Administration.
Storage for next winter is a “key measure,” and the U.S. market is about 20% below where it was a year ago and almost 10% under the five-year average, Cunningham says.
Futures prices
NGQ21,
NG00,
on July 12 settled at $3.749 per million British thermal units, the highest since Dec. 21, 2018. They’ve pulled back a bit since then, but trade more than 40% higher this year, according to Dow Jones Market Data.
Winter storm Uri earlier this year had a “double impact on gas storage, as demand increased to extreme levels across a wide portion of the country at the same time that production decreased due to infrastructure issues at wells and pipelines,” says Cunningham.
The storm in February hit Texas, the nation’s largest energy-producing state, and the frigid temperatures led to high natural-gas demand, but also caused production and pipeline issues.
Texas was the top natural-gas consuming state in 2019, accounting for nearly 15% of the nation’s total natural-gas consumption, according to the EIA.
Record heat in the U.S. Northeast, where natural gas provides a sizable portion of the electric power, caused a spike in natural-gas consumption in late June, he says. The recent heat wave in the West didn’t have a big impact on gas demand, as that region relies more heavily on hydroelectric and coal power generation than the East.
However, the “combined impact of heat and drought has reduced hydro capacity and its ability to fill the incremental power demand,” says Greg Crowley, director of Opportune’s commodity risk-management practice in Houston. That’s “challenging power grids” and supporting natural-gas prices, he says.
Natural-gas inventories also need to be replenished in preparation for the winter, and U.S. exports of the commodity have been increasing each year, says Bryan Benoit, U.S. national managing partner of energy at advisory firm Grant Thornton.
He says exports could rise by 20% to 25% this year. The EIA reported record annual U.S. natural-gas exports of 5.28 trillion cubic feet in 2020.
Domestic production should “creep upward” toward 95 billion cubic feet of dry gas per day in the next 24 months, Cunningham says, but the current outlook for winter storage is under 3.6 trillion cubic feet—about 10% less than the storage level at the start of last winter.
“At that level, even slightly colder-than-normal weather across the U.S. could leave us in a dangerous undersupplied position before the end of March 2022,” he says.
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Given expectations for tight winter supplies, “even slightly colder-than-normal weather across the U.S. could leave us in a dangerous undersupplied position before the end of March 2022.”
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Supply is likely to remain flat, with demand “highly dependent” on the summer needs of the power sector over the next 45 to 60 days, Cunningham says.
Natural gas has the potential to make another push toward $4 per million BTUs for the December and January futures contracts, but late third-quarter to early fourth-quarter contracts are likely limited to $3.85, “supported by storage refill demand,” he says.
