Rising Forecasts For 2019 U.S. Natural Gas Production Keep Prices Low
It has become a monthly occurrence now: the U.S. Energy Information Administration’s Short-Term Energy Outlook increasing its projection for 2019 U.S. natural gas production. In fact, since September alone, EIA’s National Energy Modeling System has upped its forecast for 2019 output by over 5.3 Bcf/d, or 6.3%. For perspective, this means that the U.S. is now expected to have an additional Niobrara shale’s worth of extra gas supply in 2019 than was expected just a few months ago. That is how fast the shale industry is soaring. The gas rig count last week was at 198, the highest since early-June. Per EIA, current U.S. gas production stands at around 87 Bcf/d, well above the 78 Bcf/d that we saw this time last year. Holding the mighty Marcellus and Utica shale plays, Appalachia this month is producing an astounding 30.4 Bcf/d, more than a 15% increase since last December. And the region will supply the largest incremental growth of all fields in the country, surging to a total output of 45 Bcf/d within five years. In fact, great expectations and rising EIA forecasts for domestic production explain why the U.S. gas futures market has held backwardation even though near-term pricing has spiked. Indeed, amid the long shadow of the lowest amount of gas in storage going into winter in 15 years, a cold and early start to the current winter has helped increase prices for coming contracts, although prices longer term have remained depressed. Trading activity has also helped push prices for January, February, and March 2019 to inflated levels. The initial explosion in near-term gas prices was sparked by short covering from hedge funds in mid-November. Many traders lost their shirts with the collapse in oil prices, so they quickly jumped into the gas market to compensate for their losses. Since the gas market is smaller than the oil market, such traders can have an outsized influence on pricing. In turn, from November 9 to November 14, prompt month gas pricing jumped $1.12, a 30% gain. With prices rising so quickly, gas became an overbought commodity, and the Relative Strength Index leaped from 66 to 90 (below 30 is oversold, above 70 is overbought). As far as I can tell, mid-November saw the most overbought U.S. gas market ever. The need for a downward therefore correction therefore became very apparent, and prices on November 15 crashed to $4.04, and they have been wildly fluctuating in the $4.20 to $4.70 range ever since. Looking at just the next few weeks, beware: “thin trading” volumes exacerbated by “trying to prove their worth” less experienced traders taking over for more seasoned vets off on vacation increases the potential for large and quick natural gas price swings during the week between Christmas and New Years. For Henry Hub spot natural gas, EIA has been keeping its 2019 forecast around $3.20, down from an average price of $3.29 for 2018. The reality is that despite rising current winter pricing, the market is still 3 Bcf/d oversupplied. And although that should continue into next year, make no mistake: despite forecasts for the rest of December looking warmer than normal, a “Bomb Cyclone” and/or “Polar Vortex” extreme cold in January/February could easily push prices back to around $5.00. A 20% deficit below normal for gas inventories means that the fear factor will continue to linger. U.S. gas demand wise, EIA has kept the 2019 forecast pretty consistent, at around 80-82 Bcf/d, which is where demand has been for this year. Exports, however, are not included in that total, and remain the wild card in the market. LNG exports, however, are unlikely to “sneak up” on anybody. Sure, 2019 will be the start of the U.S. LNG boom, but the market has known that these export terminals will be coming online for some time. Looking farther out though, U.S. gas demand is sure to grow even more. In order of incremental size, LNG exports, gas for power, and gas for industry are the triad of vital new demand. The reality, however, is that gas for power could be even higher than most realize. That is because as nuclear and coal retirements continue, and intermittent solar and wind simply cannot replace these baseload sources of power at nearly the level those in the renewable business want you to believe, gas will be leaned on even more. Gas is quickly elevating toward being 50% of all U.S. generation capacity. This means that we are making demand for gas used for electricity to be even more price inelastic, indicating that price spikes will not be able to lower usage all that much. Remember two things: 1) when a coal or nuclear plant gets retired, it is gone forever (i.e., dismantled) and 2) electricity, far more than even gasoline, is indispensable (i.e., it “cannot not be used”) with literally zero substitutes. Simply put, the “dash to gas” is increasingly making the price of gas irrelevant: it has to be used. Finally, gas for manufacturing might also be larger than many realize. Centered along the Gulf Coast, there are some $200 billion in manufacturing projects to utilize ethane and other liquids from gas. Not to mention that, quite logically of course, the U.S. Department of Energy is also pushing for Appalachia to become a manufacturing hub. These gas-based projects have wide bipartisan support: manufacturing has a huge “multiplier effect,” where one new job in the sector creates five or six other jobs across the economy. Indeed, as our nation increasingly turns to natural gas, we Americans must realize that without new domestic production, we will need to turn to a precarious global supply market. Russia, for instance, is responsible for nearly a quarter of all gas exports and is ready to even dominate the global LNG trade.