U.S. natural gas prices are increasingly susceptible to periodic spikes and volatility as baseload demand for gas — or the minimum level of demand that must be met on a daily basis — specifically from power generators and liquefaction plants, has rapidly climbed in recent years, and is still rising. The power sector has upped the ante on its gas consumption, with gas replacing coal as the most cost-effective go-to fuel for meeting baseload electricity demand. On top of that, feedgas deliveries to LNG export terminals have added 7 Bcf/d of demand to the gas market in the past three years, much of which is flowing at high, baseload-like rates, and that demand is set to increase further as more liquefaction projects are completed. These two market components together — LNG exports and gas-fired power generation — will take a bigger slice of domestic gas supplies, making the gas market ever more sensitive to weather, maintenance and other factors that disrupt that baseload level of demand or the supplies that serve it. We’ve already begun to see the effects of this phenomenon on Henry Hub and other regional gas prices. Today, we delve into this fundamental shift and what it could mean for the gas market.
The Henry Hub gas forward curve today looks nothing like Henry’s historical price trends (Figure 1). The latest forward curve, printed yesterday, November 19 (red line to right), settled within a relatively narrow, $0.50/MMBtu range between the summer and winter peaks, with the entire curve trading in less than a $1 range. In stark contrast, historical daily prompt-month settlements at the national benchmark hub (blue line to left) have demonstrated a propensity for swinging within a much wider annual range, and for periodically spiking (red circles).
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