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Mid-Summer Market Update: A Supply/Demand Imbalance

by Pete Lawlor


If you have not looked at the natural gas and electricity markets between May and July, you might be shocked to find these in a completely different position. The prompt-month natural gas futures contract (Henry Hub) settled at $3.66 per million British thermal units (MMBtu) on July 1, 2021, which was up $0.56/MMBtu from June 1, 2021. The average price for the prompt-month contract in June was $3.27/MMBtu, the highest June average since 2014. During Q2 2021, wholesale electricity prices ranged from $31 per megawatt hour (MWh) in the Central region (58% higher than Q2 2020), to $52/MWh in the Northwest region, which is 256% higher than in 2020.

Let’s take a look at how we got here.

Demand:

In the near term, the story with power & gas market movement typically starts with weather. In June, warmer-than-normal weather meant that cooling degree days (cDDs) were 9.6% higher than the 10-year average. The result is increased electricity demand from elevated air conditioning use which in turn increases gas demand as the most used fuel source in electricity generation. Total U.S. consumption of natural gas increased by 4.3 billion cubic feet per day (Bcf/d) from May to June. Adding to the demand picture is the post-COVID economic recovery and record liquefied natural gas (LNG) exports overseas. U.S. LNG exports were estimated at 9.0 Bcf/d in June, the most on record ever for the month.

Supply:

The spike in demand has had a major impact on the amount of natural gas in storage. For the week ending July 9, 2021, natural gas storage inventories were -543 Bcf (17.1%) below year-ago levels and -189 Bcf (6.7%) below the 5-year average. The market reaction has been increased concern for ample supply to meet winter heating demand; as such, we have seen an increase in future prices. Despite the drastic increases in consumption and higher prices, gas production has surprisingly remained relatively flat. The EIA forecasts natural gas production will average 92.6 Bcf/d in 2021, which would only be up 1.3% from 2020. From a “Rig Count” (important gas production indicator) perspective, the EIA does not anticipate a return to pre-pandemic levels until 2023.

Takeaway:

Consumers have become accustomed to an extremely depressed pricing environment from the mild weather of 2019 and pandemic of 2020. Today should be seen as a “return to normal” rather than a “new normal”. Barring a significant shift in production or weather, elevated price levels are here to stay for the time being.

Atlas Retail Energy’s expertise is understanding what is happening in the market and foreseeing trends. We are your partner when it comes to optimizing your company’s energy spend. Give us a call to discuss how to mitigate unforeseen fluctuations in your variable expenses and build an efficient plan that saves your company money.

Sources:

EIA Short-Term Energy Outlook: https://www.eia.gov/outlooks/steo/marketreview/natgas.php

EIA Short-Term Energy Outlook: https://www.eia.gov/outlooks/steo/report/electricity.php

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