Natural Gas Supply Falls and YTD Demand Increases Even in Light of COVID-193 min read
During the past two webinars, the weather reporting took a back seat to other top-of-mind considerations in the energy market, such as the impact of coronavirus on the energy industry and the economy. But in the May Market Intel Webinar, weather was back on the agenda as an energy market driver.
Constellation’s senior meteorologist, Dave Ryan, spoke to the outlook for the upcoming and important summer power generation season. Ryan spoke to models pointing to a forecast of a modestly above-normal temperature outlook in key markets, giving some measure of support to the natural gas and power markets as temperatures move quickly into a more seasonal mode from what was a very cold month of April. For more insights on what to expect, watch the webinar replay.
Natural Gas Production Falls at Fastest Rate in History
The remarkable collapse gas drilling rig count, “associated gas,” and now dry gas production in the Appalachian basin, were some of the primary topics covered during the webinar. Natural gas production was near 93 Bcf per day at the beginning of March but has fallen to as low as 85 Bcf per day this week, marking the fastest decline in production in the history of the industry. Constellation’s Commodities Management Team (CMG) outlined the relationship between the collapse in the crude oil market and its negative effect on natural gas output.
Falling gas production has been largely supportive of pricing action beyond 2021 as the market grapples with the potential for a tighter supply/demand balance developing in the second half of this year and potentially spilling into 2021 and beyond. Falling natural gas production from here depends mostly on whether crude oil pricing and production come back online. If crude oil prices remain below $35 per barrel, and if gas and liquids prices remain depressed, the likelihood for a prolonged cut to production and upward pressure on pricing could persist.
Natural Gas Demand In 2020 Has Increased Year-Over-Year
While natural gas supply has fallen over the past month at its fastest rate ever, year-to-date demand for natural gas has increased. That may be one of the most interesting statements surrounding the domestic energy market in the last decade. Despite the third warmest winter since 1950 and a severe blow to U.S. industrial and commercial consumption of gas per COVID-19, demand for natural gas is robust driven by the electric power generation sector and healthy exports. The CMG team reviewed the outlook for demand as the summer air-conditioning season arrives while pitting that increase against an expected decline over the summer of U.S. liquefied natural gas (LNG) exports.
Crude Oil Bounces Back, But Is It Enough for Long Enough?
The CMG team took a look at the latest crude oil pricing action and the reversal in oil demand domestically as many states are turning their economies back on. Crude oil prices, just a month ago, went negative for the first time and then hovered near the $15 per barrel level in mid-April. Over the past several weeks, crude oil prices have staged an impressive rally as global producers drastically cut production in an effort to rebalance the market.
U.S. demand for gasoline fell by two-thirds to about 3.5 million barrels per day in early April as lockdowns in most states crushed consumption. Average daily gasoline consumption in the U.S. is closer to 9.5 million barrels per day and such a decline has never been seen in the modern era. But gasoline demand has been on a severe uptrend reaching 7.5 million barrels per day this week as people get out, drive their cars and various state economies move to reopen. The refined petroleum markets (i.e., gasoline, jet fuel, diesel, distillate) still face major challenges going forward as the overarching effects of COVID-19 impact air, land, sea-travel and commerce.
The price of crude oil will be the major driver in the natural gas market in the second half of 2020. Low crude oil prices are bullish of natural gas and power prices, and higher crude oil pricing is bearish of gas and power, all other things being equal.
“It’s the Economy, Stupid”
Political operative James Carville made the above statement popular and the CMG team took a short dive into the economy with Constellation’s Chief Economist Ed Fortunato. Fortunato looked at the broader equities markets, discussed unemployment, the actions of the Federal Reserve and painted a broader macro picture of the U.S. economy as it may relate to energy consumption and other outputs. The debate over whether economic recovery is V-Shaped, U-shaped, or L-shaped is something that is on everyone’s mind, and Ed gave his general outlook that hovers somewhere between and V and a U with a good dose of optimism in federal policy and the resiliency of the United States.
Join us for our June Market Intel Webinar on Wednesday, June 17th, at 2 p.m. ET, where we provide updates on factors affecting energy prices, such as weather, gas storage and production, and domestic and global economic conditions. Don’t miss out on this chance to ask or hear energy questions from businesses like yours.