U.S. Rallies, Demand for Natural Gas Increases
The July 2020 natural gas contract is trading flat to yesterday’s close at $1.82 and the July 2020 crude oil contract is down $0.34 at $36.95. Demand for natural gas is beginning to increase as the country gradually rallies and is expected to rise about 6.0 Bcf/d over the next two weeks. The majority of the demand increase is due to power burns in the Northeast as the heatwave continues. Meanwhile, supply has stagnated and is staying at about 87 Bcf/d. Another healthy storage report was released today at 2,714 Bcf for the week ending May 29, 2020. This represents a net increase of 102 Bcf from the previous week. Stocks were 762 Bcf higher than last year at this time and 422 Bcf above the five-year average of 2,292 Bcf. At 2,714 Bcf, total working gas is within the five-year historical range.
According to financial reports analyzed by the EIA, global expenditures related to oil and natural gas exploration and development (E&D) increased $42 billion (13%) for 102 publicly traded oil companies in 2019, totaling $361 billion. As a result of significant crude oil price declines in 2020, global reserves are expected to be adjusted lower and E&D expenditures will also likely decline. Several companies have already announced big budget cuts. So, lower crude oil prices will mean less exploration and development.
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 has grown and surpassed any speculation that production would not be able to keep up with demand due to LNG and Mexican exports.