The U.S. natural gas market has been on edge as it awaits more clarity on the extent of the demand destruction that could transpire, both from COVID-related commercial and industrial closures and potential disruptions to U.S. LNG export activity from demand losses downstream, particularly in Europe and Asia. The CME/NYMEX Henry Hub prompt contract last week set at all-time lows for April trading — twice — before gaining ground again this week as forecasts turned decidedly more bullish for April. But the market remains under pressure, as it heads into the storage injection season with an inventory that’s well above the year-ago and five-year average levels. With the economic slowdown likely persisting, in the U.S. and globally, in the coming weeks and months, the question is, could potential demand loss send the inventory barreling toward record-high, or even capacity-testing, levels by this fall? How much demand loss would it take for that to happen? Today, we assess the potential impacts of domestic demand loss and possible LNG cargo cancellations on the U.S. gas market.
March was a tumultuous month for the U.S. gas market. As we said last week in Flirtin’ with Disaster, natural gas prices last month whipsawed within a 30-cent range, as the market evaluated the extent and timing of declines in associated gas production from oil-focused basins amid sub-$30/bbl oil prices versus the demand impact of COVID-related business shutdowns and stay-at-home orders. Gas futures earlier in March moved higher as oil prices collapsed and producers one after another began announcing massive cuts to their 2020 capital expenditures, making a slowdown in oil and associated gas production inevitable later this year. But futures reversed course later in March and tumbled to 25-year lows for the month, trading near $1.60/MMBtu as business closures and work-from-home policies mounted and the market turned its focus to what that could mean for U.S. sector demand. In the first few days of April, prompt futures fell further, dropping to $1.587/MMBtu on April 1, which at the time was the all-time low for April trading. The market then proceeded to beat that the next day with a new record low of $1.552/MMBtu. Earlier this week, prompt futures rallied back up into the high $1.80s/MMBtu before settling near $1.78/MMBtu yesterday, as cooler forecasts for April have turned the near-term outlook more bullish, particularly compared with April 2019, which was especially bearish. However, prices are still close to a $1/MMBtu lower than where they were trading at this time last year.
From a fundamentals perspective, March 2020 was downright sobering for the gas market, given that the supply-demand balance averaged nearly 8 Bcf/d longer supply than the same time last year and was the most bearish March we’ve seen since 2012, despite LNG export demand doubling versus the March 2019 average. Production gains contributed to the weaker balance, but domestic consumption declined as much as production increased, making for a double whammy on the overall balance. As we explained in Flirtin’ with Disaster, well-above-normal temperatures played a significant role in depressing domestic consumption last month, particularly residential/commercial (res/comm) heating use. But in the last week or two of March, some demand loss from non-weather-related factors became evident as more people hunkered down at home due to COVID, though some of the effects of that were at least partly offset by increased use of gas (vs. coal) for power generation as a result of rock-bottom gas prices.
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