The Impact of Declines in Natural Gas Production and Global LNG Demand3 min read
During the Constellation Energy Market Intel Webinar on June 17, the Commodities Management Group (CMG) gave attendees a rundown on the weather outlook as we are in the height of summer, a review of the economy with Exelon’s Chief Economist Ed Fortunato, a look at natural gas and power fundamentals and some discussion regarding renewable energy portfolio standards.
Macroeconomic indicators are somewhat positive as new auto sales, on an annualized basis, have improved significantly from the lows reached in April. The St. Louis Federal Reserve Bank updated U.S. auto sales, on an annualized basis, to just above 13 million vehicles, about 400,000 higher than expected. Sales of new homes and existing home sales data were positive. On the downside, new layoffs and continued high unemployment, combined with new outbreaks of COVID-19 and action by key states to tamp down economic activity, are certainly in the negative column. Gasoline consumption is about 8.7 million barrels per day for the latest reporting week and that is notable as it is only a few hundred thousand barrels per day lower than the same week last year and more than 5 million barrels per day higher than in the month of April. Hotel occupancy rates are 30% lower than the same time last year, and airline bookings continue to struggle, down 70% year-over-year.
Hotter-than-normal summer temperatures have presented through much of the nation this summer with July shaping up to be the hottest since 1950 on a population-weighted average. These high temperatures are the result of the La Niña pattern that is prevalent in the Pacific Ocean, and Constellation’s Chief Meteorologist Dave Ryan expects the hot summer to continue. Dave also noted that warmer-than-normal temperatures could prevail through October.
Natural Gas and Power Update
The hot summer is having a major impact on the amount of natural gas used to make electric power. This week, “power burns,” are expected to be somewhere in the neighborhood of 45 billion cubic feet (Bcf) per day, which would be near the all-time record. Strong demand in the power generation sector is the primary plank of support in the summer natural gas market and looks to be a factor into the fourth quarter. Record demand for natural gas-fired power generation has been offset, on the demand side, by a collapse in liquefied natural gas (LNG) exports.
On January 1, exports of LNG were near 9.5 Bcf per day. With the onset of COVID-19, global demand for LNG fell promptly by nearly two-thirds as the Asian and European economies, the two primary receivers of U.S. LNG cargoes, came to a hard shutdown. Many energy industry analysts are of the mind that U.S. LNG exports will continue to hover near 4 Bcf per day for the remainder of the summer season but begin to ramp up materially in the fourth quarter. In the near-term (next 90 days), LNG exports should be viewed as a bearish factor that begins to reverse to a bullish factor as exports increase into the winter season.
Falling Natural Gas Production
The CMG team also discussed the role of falling natural gas production and the potential for falling production levels to continue through this year and into next year. The collapse in natural gas drilling that accelerated this year to reach an all-time low, coupled with a steep decline in gas production associated with crude oil output, has dropped natural gas production about 9% from the beginning of the year. Additionally, a wave of bankruptcies and unsecured debt in the oil and gas exploration and production industries will likely weigh on production well into 2021.
Lastly, the team provided a quick overview of presidential candidate Joe Biden’s energy plan, which features $2 trillion of spending on renewables and transportation electrification, an energy jobs initiative, and a goal of reducing electric power plant emissions to zero by 2035.
Join us for our September Market Intel Webinar on Wednesday, September 23rd, at 2 p.m. ET, where we will 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.