How Should My Business React to Historic Low Gas Prices?
2 min readWarmer-than-normal weather and robust production ~94 Bcf/day have led to consistent low natural gas prices. Gas prices peaked at $2.79/MMBtu on November 8th and have declined over the course of this winter. NYMEX prices have traded below $2/MMBtu since January 17th and recently dropped to a new low of $1.75/MMBtu.
Because low prices historically have been short-lived when coming out of a warmer-than-normal winter, energy managers should look for opportunities to lock in lower prices that may be available now and in the near future.
What is Happening?
The U.S. is on track to have the fourth warmest winter since heating degree day figures began being tracked in 1950, and as a result, demand for natural gas has been low this winter. The year-over-year natural gas underground storage surplus has almost doubled from 17% on November 1st to a current surplus of 35% or 613 Bcf. Natural gas producers are struggling to show adequate returns to shareholders in this low-priced market and have cut capital budgets for drilling activity. This could lead to lower gas production in the second half of 2020.
Although natural gas supplies are plentiful currently, this may change as additional liquefied natural gas (LNG) trains come online the second half of 2020, potentially boosting exports, while domestic demand increases as well (i.e., primarily due to electric power generation). If gas production declines at the same time, the market could rebalance in the second half of 2020.
How Long are Prices Expected to Stay Low?
It’s important that customers keep in mind that gas prices at historically low levels have been short-lived.
In the 21st century, prompt-month natural gas prices have been below $2 per MMBtu less than 95 days, or less than 1.5% of the more than 5,000 business days since the turn of the century.
It’s important that customers keep in mind that gas prices at historic levels have been short-lived.
Currently, the prompt-month NYMEX Henry Hub natural gas price contract is near a 4-year low, while the NYMEX 10-year strip is near all-time lows (i.e., ~$2.50). The last time the NYMEX was this low was back in the winter of 2015-2016 when we experienced a similar warmer-than-normal winter. Yet by the fall of 2016, prices for prompt gas were more than $3.50 due to gas displacing coal generation and strong summer-driven electricity demand.
Customers should know that the supply and demand balance can change quickly if natural gas production begins to decline and demand remains robust for power generation and exports.
Constellation’s managed natural gas solution allows customers to layer in a combination of fixed prices and floating prices designed to offer more price protection. Learn more about our customized natural gas plans today.