As shoulder season approaches and gas prepares to battle with coal for power generation market share, here is the current scenario:
Gas has been taking back significant market share from coal since prices began dropping two weeks ago. But contango still reigns, and the summer is priced a little too high for gas to seize the massive market share it took from coal last spring/summer.
Gas production remains subdued relative to last year, and to expectations. That will be very supportive if the trend continues, but 1Q reports by E&P's suggest it will not, at least in Q3+.
If production begins to bound forward, prices will likely come under downward pressure because:
- Hydro surpluses will destroy 1BCFD or more of gas demand all summer
- Renewable energy (solar and wind) will grow by about that same amount again, displacing around 1 BCFD of gas demand.
- Weather was warmer than normal last year (see previous post), which will drop NG demand if we experience a normal summer, perhaps by more than 1 BCFD.
Obviously this is all against a backdrop of positive variables as well, such as LNG exports and pipeline exports to Mexico, which are all up significantly. And of course some coal plant retirements. The economy could also generate some incremental demand due to GDP growth stemming from either a recovery or stimulus. Lastly, we should see steady small upticks in industrial demand due to long lead time projects coming into service.
Also note how year-on-year pricing improves beginning in June.
