Natural Gas Market

[dan_s]

Natural gas will be the largest source of electricity in the U.S. this summer, according to a note released by the EIA on April 18th. Natural gas’s share of total U.S. electricity generation is expected to drop to 34%, down from 37% last summer, but will still exceed coal’s share of 32%.

The EIA predicts that electricity demand will drop this summer, mostly due to lower temperatures. NOAA projections for this summer indicate population-weighted cooling days will be 11% lower than 2016. These milder temperatures mean summer electricity generation is projected to be 1.16 billion megawatt hours, 2.4% lower than last summer.

Demand for natural gas for electricity generation peaks in the summer, as residential and commercial consumers use electricity for air conditioning. The EIA predicts that natural gas prices will be slightly above $3.00/MMBTU through the summer. Gas prices averaged about $2.75/MMBTU last summer, meaning higher prices are a second source of downward pressure on gas demand.

Natural gas demand first exceeded coal demand as the U.S.’s electricity fuel on a monthly basis in April 2015 and on an annual basis in 2016. Gas prices were quite low in summer 2016 which allowed natural gas to generate 37% of the country’s electricity, while 33% came from coal. The shale boom is largely responsible for this change. 10 years ago, before U.S. shale took off, natural gas fueled only 25% of the nation’s electricity while coal generated 46%.
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I predict that two things will happen in the 3rd quarter to push natural gas prices much higher than EIA's forecast of $3.00:
> It will be hot in July & August, causing a big spike in demand for power generation. We don't need record heat, just normal and "normal" in Texas in July & August is HOT and sticky.
> Cheniere will bring on Train #3 at Sabine Pass that will increase demand by over 2 Bcf per day.
Combined, these two will push natural gas in storage rapidly toward and probably below the 5-year average. If gas in storage is below the 5-year average heading into the 4th quarter, gas prices will spike as utilities bid against each other for supply.

[dan_s]

The south and northeast regions of the U.S. are most reliant on natural gas, with 43% and 44% of all electricity generation this summer projected to come from gas. The Midwest is the only region where gas is not the primary fuel source, relying on coal for 54% of its projected summer electricity consumption. The Western states have a more diversified blend of electric sources, including major hydroelectric power sources. The record precipitation California has received this winter is predicted to increase hydroelectric power generation to nearly equal that of gas in 2017. In the northeast, nuclear power plays a much larger role, approaching the same proportion of the power mix as natural gas.