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Oops, (Winter's) Out of Time - Natural Gas Buyers Party Like It's 1999

After holding above $2/MMBtu in the first half of January, the CME/NYMEX February natural gas futures contract caved in this week, closing Tuesday and Wednesday at $1.895/MMBtu and $1.905/MMBtu, respectively. The last time we saw prices this low was in March 2016. But to see such levels trading in January, typically one of the coldest and highest-demand months of the year, you’d have to go back more than two decades — to 1999. Today, we explain the fundamentals behind the price collapse earlier this week and its implications for the 2020 gas market.

The U.S. natural gas market has been in a precarious state for some months now. We discussed some of the fundamental challenges facing the market in a couple of late-injection-season blogs — I’m Tore Down and Un-Thinkable. At the time, Lower-48 dry gas production volumes had been ascending for several months straight (since July 2019) and peaked in late-November above 96 Bcf/d. Lower-48 consumption — from power generation, industrial and residential/commercial (res/comm) customers — was high and setting records of its own. But the consumption gains were modest compared with the supply increases, and were undercut by summer weather that was milder than the previous year. Also, some of the LNG export demand from new liquefaction trains that had been expected much earlier in the year came too late in the injection season to affect the inventory build-up. All that led to the market by October wiping out any remaining storage deficit versus the previous year and the five-year average, and further, amassing a large surplus in storage compared with a year earlier. Prompt-month prices, which already were trading lower than 2018, peeled even lower and by October/November were skimming near multi-decade lows for that time of year — and not just for a day here and there, but on a monthly and seasonal average basis.

Despite these bearish factors, the bulls in the market held on. The coldest, highest gas-demand months of the year were still ahead, after all — there was still the possibility that an exceptionally cold winter could reverse their fortunes. Plus, as absolute temperatures dropped heading into winter and seasonal wellhead freeze-offs took effect, production receded from the peak seen in late November, providing some support to prices.

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