Winter 2021 Preview, the Economic Recovery Begins and Natural Gas Demand Bounces Back

Article by Constellation

During our most recent Constellation Energy Market Intel Webinar on September 24, the Commodities Management Group (CMG) took a hard first look at the outlook for winter weather while examining the current state of the economy, potential election impacts to markets and, of course, the market-driving fundamentals of storage, production, exports and pricing action.

Weather Outlook

Constellation’s weather team highlighted the La Niña atmospheric condition that persists presently and looked at how this affects the outlook for winter weather in the Lower 48 states. Generally, a La Niña produces a warmer-than-normal weather solution in the eastern half of the country and warmer temperatures in the west. However, this is a generalization and there are several instances where a La Niña condition was followed by a colder-than-normal winter, as happened in 2010-11. The team also took questions about the effects of upper atmospheric smoke from the western wildfires and the potential for this to affect weather conditions over the coming weeks and potentially into winter.

Macroeconomic Update

Constellation’s chief economist, Ed Fortunato, took a look at key economic indicators as the country continues to deal with the fallout of COVID-19. The general economy of the U.S. continues to recover and there are several areas doing remarkably well: new housing starts are up significantly, sales of existing homes are very strong, auto sales continue to recover and technology companies and online retail are booming. On the other hand, millions of Americans remain unemployed, the travel and entertainment industries are flat on their backs and many small businesses are continuing to struggle. Inflation remains low and Fortunato brought up some historic price comparisons to support this, as the price of many key agriculture and energy commodities are as low, in real terms, as they were 40 years ago. The deficit and government spending were also topics of discussion. The effects of the upcoming election on energy markets were covered with comparisons and contrasts made between competing candidates’ plans. Next month, Constellation will feature a deeper dive into the potential implications to energy markets relative to the outcome on November 3.

Market Fundamentals

Natural gas storage is set for a record year as the end of the “injection season” is in sight. The Energy Information Administration (EIA) has forecast more than 4 trillion cubic feet (Tcf) of gas in storage by the end of October, an all-time record. Healthy storage inventories are a key force that have kept natural gas prices in check for most of 2020. Production of natural gas has fallen hard this year from an all-time high of 95 billion cubic feet (Bcf) per day in January to a two-year low in June of 84 Bcf per day, recently recovering to 87 Bcf per day. Importantly, the EIA forecasts natural gas production to hold steady at about 86 Bcf per day and then resume another leg down to 82 Bcf per day into the second quarter of 2021. This “structural decline” scenario for natural gas production is the key element of support and potential upward price action going forward. Exports of liquefied natural gas (LNG) started the year at near 9 Bcf per day. However, as COVID-19 shut down Asia and Europe, U.S. exports of LNG fell to 3.5 Bcf per day to start the summer. LNG exports are now in a state of recovery and are expected to return to pre-COVID levels by December. This would bring a strong plank of support to pricing action in natural gas, all other things being equal, as the winter-heating season begins. Natural gas pricing action has been highly volatile over the past few days with the prompt-month dipping below $2 per MMBtu briefly, but it bounced back to above $2.20 per MMBtu very quickly. Notably, the winter price strip and forward annual price strips have shown a lot of support, while the near-term prompt month pricing has been swinging up and down.

Come and join us next month on Wednesday, October 21 at 2 p.m. Eastern Time, for the next Energy Market Intelligence Webinar.

Listen to the September webinar