Henry Hub Spot Price Comparisons

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.

Heating Degree Day Comparisons

Gas prices have been struggling this month, with warm weather the chief culprit.  How is the current winter stacking up?  Well, the HDD count from Oct 1 through Jan 31 (next 4 day forecast assumed correct) puts this winter ahead of last winter by a 52 HDD margin.  

But we are behind the 20 year mean by a solid 299 HDD, which represents a tremendous amount of heating and electric load for natural gas.  I'm using the CPC numbers for gas-utility weighted HDDs in the calculation.  This suggests that gas could be very, very expensive had the weather been close to the mean, perhaps aiming toward a sub 1 TCF storage carryout in March/April.  That's a number that would light a fire, so to speak, under the Henry Hub forward strip.  

Here is the same data as a cumulation:

Henry Hub Comparisons

Just a quick reminder that Henry Hub Spot Price went below $2 in mid-Feb, and didn't recover above $2 until June.  That's going to make the coal vs gas competition a very different equation this year:

Summer 2014 Coal vs Natural Gas Price Environment

Most projections for natural gas fired electricity generation this summer are similar to 2013.  In spite of higher gas prices, coal plant retirements and new build gas plants are expected to preserve the natural gas market share of power generation feedstock.  Offsetting that would be the expectation for weather closer tonormal 

Here is the Henry Hub comparison between 2013 and 2014.  Spot prices are currently as close to 2013 as they have been all year.  But the forward strip holds summer 2014 gas above $4.50, while gas prices fell steadily last year, from mid April through the end of July, and never saw $4.00 again until December.  This would mean gas prices averaging almost $1.00/mcf more than prior year through the heart of the summer.

Coal prices are also up from last year's lows, but not enough to move the delivered $/mmbtu very much, and the testimonial evidence seems to suggest that gas at <$5.00 will out compete eastern coal.