Relatively cool temperatures at the start of summer across the most densely populated parts of the United States have sent natural gas prices tumbling to their lowest level for three years, piling on the misery for producers.
But the biggest losers are set to be coal miners, because low gas prices are further undermining the already fragile economics of the remaining coal-fired power stations and will likely hasten more closures.
Front-month futures prices for gas delivered to Henry Hub in Louisiana have averaged less than $2.34 per million British thermal units over the last 20 trading days, the lowest since 2016.
That is down from an average of almost $4.40 in late November and early December, and 60 cents per million Btus below the same point last year.
Heating demand during the winter of 2018/19 was moderately higher than in the previous three heating seasons but gas stocks remained fairly plentiful.
The relatively cool start to the summer has compounded the problem by cutting air-conditioning demand and power producers’ consumption of natural gas (tmsnrt.rs/2FDHRnw).
Working stocks in underground storage have risen faster – or drawn down more slowly – than the five-year seasonal average for 15 consecutive weeks since the middle of March.
REBALANCING
U.S. dry gas production during the first quarter of 2019 was almost 13% higher than in the same period a year earlier, according data from the U.S. Energy Information Administration (EIA).
But gas consumption by power producers increased by less than 7% over the same period (“Electric power monthly”, EIA, May 2019).
Gas is increasingly produced for export by pipeline to Mexico and tanker to a range of destinations in Europe and Asia (“United States has been a net exporter of natural gas for more than 12 months”, EIA, May 2).
Even with increased exports, however, the domestic market has been in surplus owing to mild temperatures and moderate power burn.
In response, gas prices are tumbling to incentivise power producers to run gas-fired generators for more hours at the expense of the remaining coal plants.
Capacity utilisation rates at gas-fired combined cycle plants has generally been in line with last year but utilisation at coal units has plummeted.
Coal plants generated just 36% of the theoretical maximum output in April 2019 compared with 42% in April 2018 and 44% in April 2017.
Power producers cut their consumption of coal by more than 6% between January and March compared with the same period a year earlier.
And coal-fired power production fell by almost 10% between January and April compared with the same four months in 2018.
The coal fleet is shrinking, with the remaining plants generating fewer and fewer hours, and often at less than full power, which will hasten their demise.
Tumbling gas prices have also begun to filter through to a slowdown in the drilling of new gas wells, with the number of active rigs down by 12% since January, according to oilfield services company Baker Hughes.
The slowdown in oil drilling should also, eventually, help curb production of associated gas, contributing to market rebalancing, though the effect could be delayed because wells tend to become gassier as they age.
In the meantime, a mild start to summer and oversupply of gas is pushing the remaining coal-fired power plants nearer to closure.
