Winter is on its Way: Where are Gas and Power Market Fundamentals As We Enter Peak Season?

Article by Commodities Management Group

During Constellation’s November Energy Market Intel Webinar, webinar presenters put the spotlight on the coming winter heating season. Constellation chief meteorologist, Dave Ryan, noted that the month of November would be among the coldest since 1950 as a bolt of very cold air moved into the eastern U.S., dominating the first half of the month with record cold. The blocking pattern that provided the cold Canadian air in early November was largely missed by the primary weather computer models taking many by surprise, Dave Ryan noted.

The weather is expected to take a turn to the mild side for the second half of November in key energy-consuming regions. The outlook for December is mixed with a potential of a repeat blocking pattern that could influence the remainder of winter going forward. Constellation’s winter forecast still calls for a 30-year average heating-degree day “normal” with a slight bias to slightly on the milder side. Several third-party vendors are calling for a colder-than-normal winter, noting the lack of sunspot activity as one of the potential drivers of such.

Natural Gas Storage and Production Update

The month of November begins with underground storage inventories at 3.75 trillion cubic feet (Tcf), a stark contrast to last year’s 10-year low inventory of 3.1 Tcf. The Constellation team held that robust storage inventories coupled with record natural gas production throughout 2019 were the two primary forces that kept a lid on the U.S. natural gas and electric power markets in the teeth of one of the coldest starts to November on record.

Natural Gas Producer Debt and Breakeven Costs

Additionally, the team looked at some data relative to breakeven costs for natural gas production in certain shale plays and discussed the role of crude oil and natural gas liquids pricing on gas and power markets in 2020.

In various shale plays, the breakeven cost of production of natural gas is near, or higher than, the current price. Producers of natural gas typically have additional revenue streams from natural gas liquids and crude oil as well so absolute “breakeven price” of natural gas is not as dire as it may appear at first glance. Nonetheless, hydrocarbon producers have been struggling with low-priced crude oil, natural gas, and natural gas liquids.

Publicly traded oil and gas producers share prices have been laid low over the past three years and that trend accelerated in 2019. This is an important consideration for end-users of natural gas and power because record natural gas production in 2019 has played a key role in depressing methane and natural gas liquids prices, which in turn have delivered poor financial results to many producers. Will low prices, poor returns on equity and low cash flow bring about a slowdown in the production of natural gas in 2020? That is one of the key market questions for the coming year.

Listen to the recording

To stay updated on these topics and more, join us in November for our next Energy Market Intel Webinar on December 18, 2019, at 2:00 p.m. ET. In next month’s webinar, we will monitor winter weather drivers, especially “blocking”, and review key market and weather highlights of 2019 and explore what is in store for 2020.