Here we go again, sounding like a broken clock again. “Production is simply not high enough,” yells HFIR from afar. But this time, it’s not just the fact that Lower 48 gas production isn’t high enough, but that demand is starting to surprise to the upside. Who would’ve thought, with Henry Hub trading above $8/MMBtu?
With a dash of support from Mother Nature, power burn demand is at the highest level for this time of the year.
We’ve been saying for a while now, but the usual gas-to-coal switching won’t happen this year as the coal stockpile remains incredibly low. In fact, the gas-to-coal switching probably won’t happen for the foreseeable future, since there are no new coal supplies coming online. You combine that with cooling demand picking up in key demand regions, and you have power burn surprising to the upside.
And because of the shortage of global LNG along with new LNG export capacity being added in the U.S., LNG gas exports are moving higher and will hit a new all-time high later this year. The combo of high power burn + high LNG gas exports is pushing total gas demand to come in at the highest level for this time of the year.
Finally, if you look at the fact that Lower 48 gas production remains depressingly flat, you get the picture of why natural gas prices will have to go a lot higher than today.
At the moment, we have EOS coming in at ~3.2 Tcf, which is crazy low given the backdrop of natural gas fundamentals.
The last time we were anywhere near those levels in November was in 2018, but you can’t compare the two periods because Lower 48 gas production grew almost ~10 Bcf/d that year. While this year, we are still down versus where we ended in 2021.
It may be a bit hard to believe, but natural gas prices are probably going a lot higher than today, given everything we’ve discussed here.
This is how we are doing YTD:
This is how we did in 2021: