So far2021 has left much to be desired in regards to natural gas. Lower production and higher heating demand have given way to substantially higher prices. The Texas freeze did nothing to help this, causing an additional increase in February. Henry Hub averaged $2.83/MMBtu from January through March. This a $0.88/MMBtu increase from the same time last year.  

However, higher natural gas prices are not the only thing to account for. Powerburn, electricity generated from natural gas, continues to lag. The increased competition from renewables coupled with the higher natural gas prices has led to a steady decline in natural gas-fired generation. According to the U.S. Energy Information Administration, natural gas-fired generation has declined nearly 7%which is the first year-over-year decline since 2017.  

The recent capacity additions of wind and solar power plants have made natural gas-fired generation seemingly unpopular. Between May 2020 and February 2021, we have seen a 15% increase in solar and wind generation. Preliminary Monthly Electric Generator Inventory reports that an additional 28.7 GW (gigawatts) is planned to come online by the end of 2021. This comes after the latest addition of 22.5 GWThis led to a decrease in the amount of natural gas capacity coming online.  

With natural gas-fired generation deemed less than favorable, coal-fired generation is on the rise. The inverse occurs, coal-to-gas switching, when natural gas prices are favorable. Coal-fired generation has increased nearly 40% in 2021. We expect this trend to continue through 2022. 

In the near term, natural gas markets are in retreat this week as prices fail to break through 3 dollars, a major resistance level. Weather models support a price reduction as demand is predicted to continue to be low and we continue to see drilling rigs being added. The lack of price movement coupled with the weather/demand correlation drives the current bearish sentiment.  

We think prompt month natural gas prices will trade within the range of $2.50-$3.00 this year with spring and summer contracts struggling to remain elevated. That being said, we recommend remaining unhedged for a portion of your summer peak load and monitoring prices past 2022 for value relative to current budget levels.  

 Additional Market Drivers: 

  • Liquified Natural Gas (LNG) is likely to remain in high demand due to global prices being much higher than that of the US. 
  • Mexican natural gas exports remain elevated and are expected to continue to increase. 

Sources: U.S. Energy Information Administration 

Nick Gerome, CTA, Taurus Advisory Group