Soaring natural gas prices could be imminent



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Workers watch the liquefied natural gas tanker Sakura moored at the Negishi LNG terminal in Tokyo, Yokohama, Japan on Monday, May 21, 2018. & nbsp; This is the first cargo of LNG in Japan from Dominion Energy's Cove Point facility. LNG exports in recent years have increased significantly, which is one of many new drivers of demand in the natural gas markets. Photographer: Tomohiro Ohsumi / Bloomberg

In the previous article, & nbsp;The United States is still the world king of natural gas, I highlighted the rise of the United States as the world's first natural gas superpower.

But it's easy to forget the vision of natural gas markets in the United States around 2005. At that time, natural gas production in the United States had begun to decline. Spot prices for natural gas regularly exceeded US $ 10 per million British thermal units (MMBtu) and sometimes reached US $ 15 / MMBtu.

Henry Hub natural gas spot price.EIA

The late Matt Simmons predicted in 2003 that by "certainty" by 2005, the United States would embark on a long-term natural gas crisis for which the only solution was to "pray". & Nbsp;T. Boone Pickens and a number of top level insiders in the energy sector shared this view.

ConocoPhillips and ExxonMobil have made significant acquisitions of natural gas companies, betting on a future characterized by much higher natural gas prices. & Nbsp; LNG import terminals were built to help fill the expected supply gap.

Of course, that did not happen. Natural gas production & nbsp; greatly increased & nbsp; because of progress & nbsp; in hydraulic fracturing and horizontal drilling, which kept prices under control. Natural gas spot prices fell below $ 10 / MMBtu in 2008 and, since 2010, have rarely been above $ 5 / MMBtu.

There have been two exceptions since. During the winter of 2014, low natural gas inventories led to a sharp rise in spot prices above $ 8 / MMBtu. This was repeated in the first week of this year, when low inventories led to a brief rise in prices above $ 6 / MMBtu. I circled this period in the graph below:

Natural gas operation in underground storage.EIA

Because natural gas consumption in the United States is highly seasonal, producers use a pressurized underground storage system that builds stocks from spring to mid-fall. During the winter heating season, demand for natural gas increases and this storage is exhausted.

In the case of a mild winter like in 2012, stocks might not be depleted significantly before they begin to replenish themselves. In fact, the 2011-2012 winter did not bring gas inventories down to less than 2 trillion cubic feet (Tcf) for the first time in more than 20 years. Stocks in 2012 hit a floor in early March above 2 Tcf, which was also two to four weeks earlier than normal.

Seasonal levels of natural gas storage.EIA

Note the correlation between these storage levels and natural gas prices. After the heat of 2012, natural gas spot prices capped a month later at less than $ 2 per million Btu (MMBtu) and did not return to the $ 4 / MBB level for a full year . However, after the winter of 2014, when stocks finally reached their lowest level in a decade, natural gas prices briefly exceeded $ 8 / MMBtu and spent most of 2014 above $ 4. / MMBtu.

Now, notice the current state of natural gas stocks as we head into the high demand season (which begins around November 1 of each year). Seasonal stocks are in the lower range of the five-year average, and last week they were slightly below this range. And as US demand has increased about 8% over the last five years, the current inventory will cover fewer days of demand than it would have been at the same time five years ago.

However, natural gas prices do not reflect a high supply risk. Natural gas prices for January and February 2019 shipments are just over $ 3 / MMBtu.

Investors in natural gas futures contracts or in natural gas producers must closely monitor this situation as there is a risk of disconnection between the risk of natural gas supply and the reality of prices. & Nbsp; Unless stocks return to normal over the next few months, the risk of much higher prices by the end of winter will be significantly higher.

The price of natural gas is currently perfect, with the implicit assumption that production will resume sufficiently to avoid supply problems. This scenario of perfection involves many risks (a cold winter, a hiccup in production, an increase in exports to Mexico) which, in my opinion, are not sufficiently priced in the market.

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Workers examine the liquefied natural gas tanker Sakura, moored at the Negishi LNG terminal in Tokyo, Yokohama, Japan, on Monday, May 21, 2018. This is the first shipment of LNG to Japan from the installation of Dominion Energy at Cove Point. LNG exports in recent years have increased significantly, which is one of many new drivers of demand in the natural gas markets. Photographer: Tomohiro Ohsumi / Bloomberg

In the previous article, The United States is still the world's king of natural gas, I stressed the rise of the United States as the world's first natural gas superpower.

But it's easy to forget the vision of natural gas markets in the United States around 2005. At that time, natural gas production in the United States had begun to decline. Spot prices for natural gas regularly exceeded US $ 10 per million British thermal units (MMBtu) and sometimes reached US $ 15 / MMBtu.

Henry Hub natural gas spot price.EIA

The late Matt Simmons predicted in 2003 that with "certainty" by 2005, the United States would embark on a long-term natural gas crisis for which the only solution was to "pray". T. Boone Pickens and a number of top level insiders in the energy sector shared this view.

ConocoPhillips and ExxonMobil have made significant acquisitions of natural gas companies, betting on a future characterized by much higher natural gas prices. LNG import terminals were built to help fill the expected supply gap.

Of course, that did not happen. Natural gas production increased strongly due to advances in hydraulic fracturing and horizontal drilling, which helped control prices. Natural gas spot prices fell below $ 10 / MMBtu in 2008 and, since 2010, have rarely been above $ 5 / MMBtu.

There have been two exceptions since. During the winter of 2014, low natural gas inventories led to a sharp rise in spot prices above $ 8 / MMBtu. This was repeated in the first week of this year, when low inventories led to a brief rise in prices above $ 6 / MMBtu. I circled this period in the graph below:

Natural gas operation in underground storage.EIA

Because natural gas consumption in the United States is highly seasonal, producers use a pressurized underground storage system that builds stocks from spring to mid-fall. During the winter heating season, demand for natural gas increases and this storage is exhausted.

In the case of a mild winter like in 2012, stocks might not be depleted significantly before they begin to replenish themselves. In fact, the 2011-2012 winter did not bring gas inventories down to less than 2 trillion cubic feet (Tcf) for the first time in more than 20 years. Stocks in 2012 hit a floor in early March above 2 Tcf, which was also two to four weeks earlier than normal.

Seasonal levels of natural gas storage.EIA

Note the correlation between these storage levels and natural gas prices. After the heat of 2012, natural gas spot prices capped a month later at less than $ 2 per million Btu (MMBtu) and did not return to the $ 4 / MBB level for a full year . However, after the winter of 2014, when stocks finally reached their lowest level in a decade, natural gas prices briefly exceeded $ 8 / MMBtu and spent most of 2014 above $ 4. / MMBtu.

Now, notice the current state of natural gas stocks as we head into the high demand season (which begins around November 1 of each year). Seasonal stocks are in the lower range of the five-year average, and last week they were slightly below this range. And since US demand has increased by about 8% over the last five years, the current stock has fewer demand days than it would have at the same time five years ago.

However, natural gas prices do not reflect a high supply risk. Natural gas prices for January and February 2019 shipments are just over $ 3 / MMBtu.

Investors in natural gas futures or natural gas producers need to closely monitor this situation as there may be a lag between the risk of natural gas supply and the reality of prices. Unless stocks return to the normal range in the coming months, the risk of seeing prices rise much faster by the end of the winter will be significantly higher.

The price of natural gas is currently perfect, with the implicit assumption that production will resume sufficiently to avoid supply problems. This scenario of perfection involves many risks (a cold winter, a hiccup in production, an increase in exports to Mexico) which, in my opinion, are not sufficiently priced in the market.