Natural Gas Price Keeps Falling and Falling – Is there an End?
Gas prices being this low is not amazing. What I do think is amazing is the forward strip. Clearly in the “shoulder” month – high supply and low demand – prices can capitulate. However when demand does pick up as we head into winter it would be very unlikely to have prices stay below $3.50. I documented this phenoman in my presentation that I did at the Platts Coal Properties & Investment Conference. In a nutshell you are seeing for every 10cent drop in price almost 1 bcf/d of more gas consumption in the power sector.
Breaking it down – just from weather in November to December over the past 10 years demand has risen on average 18 bcf/d. Over the last two years over 24 bcf/d. Now given the price impact on the power sector you can expect at least an additional 6 bcf/d above and beyond the weather impact. A total of 30 bcf/d of incremental increase demand in one month has never been seen. Last year we saw a rise of 25 bcf/d and the price responded accordingly.
Last year prices of the henry hub bottomed out at $3.20 then within a month time prices climbed over $4 – peaking at $4.55 in January. Unless weather is abnormally warm I dont expect anything different this year. Coal prices that utilities are paying for (FOB + Delivery) are higher across the board. In the end its the spread that matters not the absolute price of natural gas. The forward curve is seriously discounting the demand surge expected when the winter weather comes.
David K. Bellman
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