Over the past 20-some days, U.S. natural gas prices have gone from being the lowest in more than a decade to very close to last year’s levels. The July 2016 CME/NYMEX Henry Hub natural gas futures contract on Thursday (June 23) settled at $2.698/MMBtu, up about 70 cents (36%) from where the June contract expired ($1.963/MMBtu on May 26) and also up nearly 50 cents (23%) from where the July contract started as prompt month on May 27 (at $2.169). Market buying to unwind short positions initially kick-started the rally, but since then hot weather and a boost in power demand has kept the rally going. National average temperatures have averaged nearly 8 degrees (Fahrenheit, or F) higher in June to date versus May, and in the past week they’ve climbed above the peak summer levels normally not seen until mid- to late-July. Gas consumption on a temperature-adjusted basis also soared in the first half of June, led by power burn (gas use for power generation). The combination of hot weather and higher gas usage per degree of demand has been practically made-to-order for the oversupplied gas market, and has led to record power burn in June to date. But higher prices have the potential for bearish consequences—the recent gains have catapulted natural gas prices well above prices for coal on a cost-per-MMBtu basis—making the latter fuel more economically competitive in the power generation sector. That’s welcome news for coal producers, but what will it do to natural gas demand and in turn gas prices? Today, we look at the shift in the coal-gas price relationship and the potential impact to power burn and the gas market.
The RBN NATGAS Haynesville is a weekly natural gas fundamentals analysis focused on supply, flow, and LNG-driven demand dynamics within the Haynesville basin.
Last week, in the first episode of “What’s Going On?,” we noted a big fundamental shift that occurred in the U.S. natural gas market starting June 1 (2016), just as baseload contracts for gas purchased in May for expected June demand kicked in. Around that time, the temperature-adjusted demand model used in NATGAS Billboard (our daily natural gas market report joint venture with IAF Advisors) showed gas consumption in the power sector jumped well above historical norms for the same observed temperatures (aka temperature-adjusted power burn). Whereas temperature-adjusted power burn had been less than 3.0 Bcf/d above the historical norm in May, it jumped to over 5.0 Bcf/d in the first three days of June, surpassed 6.0 Bcf/d on June 13 (2016) and has now averaged over 4.0 Bcf/d in the first half of June. Absolute power burn has averaged a record 31.5 Bcf/d in June to date; that’s 1.7 Bcf/d higher than the previous record (June 2015) and more than 3.5 Bcf/d higher than the record before that in June 2012 (Figure 1).
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About the song
“What's Going On” is the title of the single from the 1971 album of the same name by Motown artist Marvin Gaye. It was written after Four Tops member Renaldo Benson, along with fellow Motown songwriter Al Cleveland, wrote the first version of the song that was given to Marvin Gaye for consideration. Gaye loved the tune but rearranged it and added a new melody, sharing in the songwriting credits on the song.
When Gaye played the song to Motown label head Barry Gordy, he hated it, saying the song was too political to be a hit. Motown executives Harry Balk and Barney Ales disagreed with Gordy's appraisal and helped Gaye record the song and put out the single. It immediately became a smash hit, going to #1 on the Hot Soul Singles chart and #2 on the Billboard Top 100 chart. Barry Gordy was stunned by the success of the single and gave Gaye the green light to record and produce a complete album. The album was recorded between June 1970 and May 1971 and became the first Marvin Gaye album to reach Billboard's Top Ten in the Top LP category, and peaked at #6, staying on the charts for a year.
Marvin Gaye helped to shape the sound of Motown in the sixties with a string of hit singles. What's Going On was a revolutionary departure from focusing on hit singles to shifting toward an album-oriented consciousness with a recurring social theme. Marvin Gaye died in 1984 at the age of 44, fatally shot by his father at their Los Angeles home. Among his many awards is a Grammy Lifetime Achievement Award, induction into the Rock and Roll Hall of Fame, and a star on the Hollywood Walk of Fame.
Comments
Kind of a general question here around if switching economics have changed. Are the prices for switching back to coal from natural gas higher now than they were a couple years back when we were switching from coal to natural gas? Given costs, etc. to turn coal plants back on or shift to a different spot on the dispatch curve, and all the capex spent to switch to natural gas, are these prices stale and too low?
Coal to Gas switching prices (from CSX management presentations):
- CAPP/NAPP: high $4s-$5 natural gas
- Ill. Basin: high $3s natural gas
- PRB: mid-$2s natural gas