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Natural Gas Markets Caught In Surprising Trend Moves

Commodities traders have seen demand for natural continue to grow in the United States as a result of a switch from gas-fired power generation from coal.  Additionally, export growth in liquefied natural gas has supported market valuations over the last few quarters.  

Recent price trends, however, have started to show signs of bearishness, as gas futures dropped to their weakest levels since 2016.  At the same time, spot prices fell to their weakest levels in roughly two decades. Scott DiSavino recently reported that this slump in market prices has been accompanied by the largest accumulation of net short positions on record:

Overall, there is no doubt that this is an ominous trend.  As Arsalan Syed reports, these bearish price trajectories can be explained by the fact that the pace of production is rising more quickly than market demand.  Weekly data reports continue to show that this is the case, despite prior analyst estimates which might have suggested otherwise.

Not all of these factors have been visible in the U.S. media coverage, as the financial news outlets have maintained focus on the macro shift to gas from oil, sustained gains in demand for liquefied natural gas (LNG), and the second shale revolution.  

Indeed, the International Energy Agency (IEA) has released forecasts suggesting the U.S. is expected to become the global leader in natural gas exports by 2024.  By then, the U.S. is projected to achieve total exports of more than 100 billion cubic meters, overtaking figures expected in both Australian and Qatar.

These forecasts have had relatively little impact on market trends, as gas producers in the U.S. continue to face challenges.  Last April, the benchmark contract in natural gas (Waha Hub) dropped to -$9 per mmBtu. The following month, markets turned negative once again and hit a valuation of -$4.28 per mmBtu.  Overall, the first five months of 2019 saw average prices hover near a dismal $0.92 per mmBtu.  When any industry is in need of cash, the worst thing that can happen is that prices fall into negative territory and several analysts have suggested the Permian region is the central negative factor.  

Despite the Permian’s stellar reputation as an energy producer, the region has become overcrowded with oil drillers and this has led to unfavorable production scenarios.  As Nigel Frith reports, military tensions in the Mediterranean and Gulf regions have impacted sentiment and sent oil prices higher in the last several weeks.  Current industry projections in energy depend heavily on stable trends in crude oil markets, and those trends have been exacerbated by weak pipeline capacity (which has impacted storage facilities for surplus gas).  

However, even with this diminished pipeline capacity, natural gas supply has been rising.  During the first month of August, gas in storage rose to 2.689 trillion cubic feet (a gain of 55 billion cubic feet).  Production levels in 2019 are expected to reach 91 billion cubic feet, which is an increase of roughly 10% from last year (when markets reached record highs above 83 billion cubic feet).

At the same time, world demand for natural gas is rising with the U.S. showing the largest surge.  This is not surprising, given the country’s widespread acceptance of gas-fired power plants. However, the IEA’s 2019 report suggests China may become a more significant driver of demand in the medium term.

Of course, clear risks remain for these projections as geopolitical tensions add a significant factor of uncertainty.  While China is expected to become the largest importer of U.S. gas, projections will likely be revised if trade disputes continue to escalate.  China has already made significant reductions in its LNG intake, which could change the outlook for the nascent industry.  Overall, these long-term factors have complicated matters for energy traders as the market trends have already altered analyst expectations for the remainder of 2019.

Richard Cox's picture

Thank Richard for the Post!

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Bob Meinetz's picture
Bob Meinetz on Aug 20, 2019 2:44 pm GMT

"Overall, there is no doubt that this is an ominous trend."

There is no doubt this is a positive trend, Richard. Leave it in the ground.

Richard Cox's picture
Richard Cox on Aug 20, 2019 3:01 pm GMT

Not sure what your reference is here. 

In price analysis terms, this would be a trend that is clearly negative.

Bob Meinetz's picture
Bob Meinetz on Aug 20, 2019 3:25 pm GMT

Richard, my reference was in environmental terms, for those who might consider 100,000-year trends in climate change and species extinction more ominous than immediate concerns of investors. Overall.

Brian Lane's picture
Brian Lane on Aug 20, 2019 5:44 pm GMT

Gentleman, The word [demand] is irrefutable. The [reality] of this conversation which is put into context by Bob in his referenced enviromental terms is also, perhaps..... irrefutable. 

Matt Chester's picture
Matt Chester on Aug 20, 2019 10:20 pm GMT

Richard-- how do you see this affecting the decisions of the gas/LNG producers in the United States in the near-term? It seems there's certainly overseas demand for the fuels long term, but will this change their strategy any?

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