Natural gas prices

[dan_s]

Natural gas trades on regional market (unlike oil that trades on a global market). The U.S. gas market is now over-supplied, but I believe supply/demand will tighten by the beginning of the next winter heating season. Natural gas production will be 3 to 4 Bcf per day less YOY by December and demand is expected to increase by 2 to 3 Bcf per day. To put this in context, the U.S. consumed just over 80 Bcf per day in 2015. Demand is expected to be 83 Bcf per day in 2016, assuming a normal summer cooling season. By 2020, U.S. demand is expected to be 100 Bcf per day, with a lot of increase will be due to exports (LNG and via pipeline) and electrical power plant demand. In my opinion, we'll need U.S. natural gas prices over $3.50/mmbtu to get production going up again. - Dan

Natural Gas & Power: Coal & Nuclear Retirements Support Our Constructive View
Stephen C Byrd – Morgan Stanley
May 20, 2016 4:01 AM GMT

This May ~5.25 GW of potential coal and nuclear retirements have been announced. This is incremental to our forecast, and supportive of our constructive nat gas & power view. In the near term, we are monitoring summer weather trends, as current forecasts call for hotter than normal conditions (which will increase demand from natural gas fired power plants).

~5.25 GW of new potential coal and nuclear retirements are supportive of gas and power prices. Over the last few weeks an incremental ~1.85 GW of coal plant shutdowns and ~3.4 GW of potential nuclear retirements have been announced for the 2016-18 period. These announcements come in response to challenged economics for baseload coal and nuclear power plants in the current low gas price environment, a trend which we expect may continue over the next several years, particularly for coal generation. Interestingly, the majority of these plant shutdowns (~4.8 GW) are located in the state of Illinois. These retirements are incremental to our prior forecast, and are supportive of gas demand while also helping tighten regional power markets.

We detail each announcement below:
Illinois Coal: ~1.85 GW. On May 3 Dynegy (DYN) announced the shutdowns of three coal plants located in the MISO portion of Illinois: Baldwin Unit 1 in Oct 2016 (590 MW), Newton Unit 2 in Sep 2016 (615 MW), and Baldwin unit 3 in Mar 2017 (630 MW). The plants are being mothballed (rather than completely retired), so the company retains the option to bring the plants back into service for a 3 year period following the closure date, should market conditions improve. This announcement comes in addition to the 465 MW Wood River retirement scheduled for June 2016, also in the MISO region, which was announced late last year. Management noted they plan to announce an incremental ~500 MW coal shutdown in the same region later this year.

Illinois Nuclear: ~2.9 GW. On May 6, Exelon (EXC) announced that it will retire the ~1.1 GW Clinton plant on June 1, 2017 and the ~1.8 GW Quad Cities plant (both are nuclear) if Illinois does not pass legislation supporting the uneconomic plants by May 31, 2016 and if Quad Cities does not clear in the 2019/20 PJM Capacity Auction (results released on May 24th). The economics of these two plants are under pressure from the buildout of wind in the Midwest and low gas prices. Technically, the company has until the fall of 2016 to make a final decision on Clinton and slightly more time on Quad Cities driven by retirement notification requirements.

Other Nuclear: ~500 MW. On May 12, the Omaha Public Power District recommended that its Fort Calhoun nuclear plant be shut by year-end due to poor economics. Interestingly, this is a regulated plant with nearly 20 years remaining on its operating license.

Capacity retirements further support bullish 2017 natural gas thesis; also helps in 2018. When converted to a gas demand equivalent, the announced and potential ~4.8 GW of Midwest coal/nuclear retirements would add 332 MMcf/d (or 21% from 2015 levels) to regional gas power demand by mid-2018. The Fort Calhoun nuclear plant retirement would add an incremental
~37 MMcf/d in Nebraska beginning in January 2017. Interestingly, nearly 60% of the total gas demand impact is expected to be felt from late 2016-2017 and just as we anticipate natural gas balances were already to be their tightest. Not only do these recent announcements further support our calls for a tighter natural gas S&D in 2017 and the need for higher prices, but they also minimize the negative gas demand impacts from ramped additions in regional renewable generation which continue to take market share. Additional announcements for retirements, which look increasingly likely, would only add to this thesis.