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Natural Gas Consumption Comes Close to Record High

The NYMEX September 2018 contract closed yesterday at $2.816/MMBtu, which is 0.21% below this past Friday’s $2.822/MMBtu August 2018 contract expiration price. Henry Hub spot prices rose to $2.80/MMBtu this past Wednesday from $2.77/MMBtu the prior Wednesday. Natural gas in storage increased 35 bcf from 2,273 bcf to 2,308 bcf. Analysts expected stockpiles to increase by 45 bcf. The total natural gas in storage is 23% below last year and 19.7% below the five-year (2013-2017) average. “Net injections into storage are 19% lower than the five-year average rate so far in the 2018 refill season. If working gas stocks match the five-year average rate of injections of 9.6 bcf/d for the remainder of the refill season, inventories will total 3,250 bcf on 10/31/18, 310 bcf lower than the five-year low of 3,560 bcf” (EIA).

The EIA’s Natural Gas Weekly Update reported that natural gas consumption for power generation this past July almost reached the all-time record high. Power burn averaged 36.9 bcf/d in July 2018 and data from the EIA’s Natural Gas Monthly report indicated, “the highest average level of power burn in any month through May 2018 was 37.2 bcf/d in August 2016.” The high power burn in July is consistent with the long-term trends in natural gas consumption. The majority of consumption growth has come from the electric power and industrial sectors the past few years. Annual power burn growth has averaged 0.8 bcf/d from 2010 to 2017 (EIA).

Natural gas pricing plays a key role in electricity power pricing due to the increasing reliance on natural gas fired generators as nuclear, coal, and oil generation is retired and mothballed. As the marginal unit of generation, gas prices are directly correlated to power pricing (more so in some regions such as NYC vs. others such as parts of PJM). We keep an eye on natural gas market fundamentals in order to provide insights into forward power pricing for our clients. Gas production is expected to continue to grow, however, there is speculation that demand growth will outpace supply primarily due to LNG and Mexican exports and increased power burn, presenting upside risk to power pricing in the future.