Viewpoint: Low US midcon gas prices may incentivize use

Market: Natural gas
26/12/23

Natural gas will likely remain the dominant source fuel for power generation in the US midcontinent in the near-term, surrendering littleif any market share to coal or renewables, because of its lower prices.

Nymex prompt-month prices earlier this month were plumbing six-month lows near $2.30/mmBtu on higher US gas production, lackluster demand and robust inventories, leading some analysts to revise their 2024 outlook for US gas prices lower. Those forecasts highlight how lower prices will incentivize demand to balance the market in the near term.

The Henry Hub spot price was projected to average $2.80/mmBtu through 31 March, the end of the winter heating season, and average $2.36/mmBtu during the second quarter of 2024, the US Energy Information Administration (EIA) said. That compares with an average price of $2.64/mmBtu during the first quarter of 2023 and an average price of $2.16/mmBtu during the second quarter of 2023.

The Chicago Citygates index, a bellwether for upper midcontinent demand, averaged $2.61/mmBtu for the first quarter of 2023 and averaged $2.01/mmBtu in the second quarter of this year. Key heating markets like the Chicago Citygates often trade at a discount to the US benchmark price outside of the winter because of its access to Gulf coast and northeast supplies.

Those early 2023 higher prices occurred during an unseasonably warm winter. A repeat of unseasonable warmth this winter would send prices "spiraling lower," East Daley Analytics analyst Jack Weixel said, noting that those lower prices would boost power sector consumption to the levels needed to slow inventory growth in spring 2024.

During a typical winter, there is usually about 2.4 Bcf/d (68mn m³/d) of incremental residential and commercial demand. But with warmer winter weather that demand would be cut, resulting in about 300 Bcf not being pulled from storage. This would leave US storage inventories at around 2.1 Tcf by the end of March, or roughly 550 Bcf higher than the five-year-average for the period.

A surplus of that magnitude would mean gas prices averaging $2/mmBtu or lower, and that would certainly incentivize gas-fired power burn to be higher next year, Weixel added.

Analysts with Tudor Pickering Holt also cut their outlook for natural gas prices in 2024 following news that the first LNG production from the 18.1mn t/yr Golden Pass terminal in Texas will be delayed until the first half of 2025. The delay will push the 2024 curve below $2.50/mmBtu, compared with a previously projected price of $2.75/mmBtu.

The Chicago Citygates price was $2.80/mmBtu for January and was $2.45/mmBtu for July, according to Argus forward curves. The Oneok, Oklahoma, price was $2.83/mmBtu for January and was $2.25/mmBtu for July.

The US this summer met almost half of its electricity demand from natural gas, with its share of the power mix rising to 45pc from 43pc last summer, the International Energy Agency said. This was a result of lower gas prices, coal plant retirements and higher cooling demand in some regions. Coal-fired generation this summer declined to 19pc from 22pc last summer.

The EIA expects coal-fired generation to plunge in the coming years, while gas-fired generation will continue to hold the lion's share of US generation mix and renewable energy capacity will continue to accelerate.

By Taylor Zavala

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