Weather is the perpetual wildcard in the natural gas market, but it’s been particularly shifty this winter, keeping market participants — and weather forecasters, for that matter — on their toes. Gas futures prices started this season at $3.30-plus/MMBtu, but then endured some of the warmest weather on record (in November and January), including a couple of polar vortex head fakes over the past month or so — weather forecasts at times in January started off much colder but ultimately reversed course. Prompt CME/NYMEX Henry Hub futures prices have seesawed as a result. Despite the weather setbacks, however, prices have held on in the $2.40-$2.70/MMBtu range through much of winter and averaged more than $0.60/MMBtu higher year-on-year in January. And, with an Arctic blast set to unfurl across the Lower 48 this week, prices last Friday topped $3/MMBtu again in intraday trading before settling in the high-$2.80s/MMBtu Friday and Monday. Today, we examine the supply-demand factors underlying the recent price action, and prospects for sustained $3/MMBtu gas prices.
In yesterday’s blog, Cold As Ice, we discussed the potential impacts of this week’s polar vortex event on the U.S. propane market (and how it may differ from similar events in the past). Now we turn our attention to what the extreme weather will mean for the U.S. natural gas market.
Well before the storage withdrawal season got underway in November 2020, it was apparent that the gas market was poised to tighten in late 2020. Rig counts were at decade-long lows, Lower-48 gas production was trailing by more than 7 Bcf/d year-on-year heading into the winter season (November through March), and it would take months, if not more than a year, for production volumes to return to their pre-pandemic peaks. At the same time, U.S. LNG exports were set to make a strong comeback after being throttled by anemic international demand and prices for much of 2020. But the storage inventory had exited injection season (April through October) with a 200-Bcf surplus vs. the previous year. So the question was not whether the market would tighten but rather by how much. And that ultimately would come down to weather — still the biggest driver of domestic gas consumption and the #1 unknown, made even dicier by the polar vortex effect in recent years. A cold winter could rapidly wipe out the storage surplus and even lead to a substantial deficit, enough to support prices throughout 2021. On the other hand, another warm winter could easily offset the effects of production losses and LNG exports, leaving a lingering or even larger storage surplus to weigh on prices.
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