Energy Market Update: Natural Gas Production

There is no denying the winter of ’17-’18 has been cold. Historic low temperatures have been recorded throughout the United States, and much of the country experienced significant snowfall. This weather is reminiscent of the ’13-’14 polar vortex event, and indeed, a few sources have already called this winter “Polar Vortex 2.0”.

As many know, the winter of ’13-’14 had a dramatic impact on natural gas and electricity prices, leading to some customers experiencing bills that more than doubled their usual monthly payment. However, despite similar conditions, most customers today will likely not see their bill skyrocket. Why is that?

We’ve discussed in previous articles the balance between natural gas and electricity prices. We’ve also discussed the factors that influence the price of natural gas. Each factor contributes to the overall function of a price of a commodity, namely, supply and demand.

A winter like this leads to dwindling supply, and rising demand. That creates upward pressure on prices. However, while the winter of 2013/14 brought Henry Hub spot prices for natural gas to the $4-$5/MMBtu range, prices for the same time period in 2017/18 have remained largely in the $3 range. One might assume that this means the supply of natural gas is large enough to mute the upward pressures of weather related demand. In actuality, natural gas storage levels entered this winter at their lowest point since 2014, and remain 12% below the five-year average.

So, that prompts the question: why are natural gas prices still so low? Why is this winter different than the winter of 2013/14? One main cause is production. In 2013, the infrastructure to support the Marcellus/Utica Basins simply wasn’t there, limiting the ability of the fuel to meet demand. In 2017, however, new pipelines dramatically increased production and created a limiter on prices. In 2013, average production totaled 66.5 billion cubic feet per day (Bcf/d). In 2017, we averaged 73.5 Bcf/d, and we are expected to increase to 80.4 in the coming year, according to a recent EIA projection. If correct, that would be the highest year-over-year increase on record.

However, there’s another factor at work here in the form of hedging. Normally, low prices lead to less production, which is a natural factor of supply and demand. In this case, the producers in the Appalachia are hedging their bets by continuing the expand their supplies because they anticipate being able to sell their gas to areas with less production, where prices are higher. This accounts for the rise in liquefied natural gas (LNG) exports, as well as the race to expand pipeline capabilities out of Appalachia. Dominion South’s spot prices are regularly $0.50-$1.00 lower than the Henry Hub spot price, which is used as the industry average.

In conclusion, despite a cold winter and low natural gas storage levels, domestic natural gas prices continue to be solidly within the $3.00/MMBtu range due to rising natural gas production. As natural gas continues to represent a growing contributor to fuel mix, and natural-gas fired electricity generation continues to rise, it will be interesting to see what the future brings for electricity prices across the nation. In the meantime, this period of production-related capping represents a great time to examine electricity pricing, especially for supply contracts that may be nearing expiration. Feel free to contact us with any related inquiries.