July22,2019 BARRON’S M9
Commodities Corner
Low Prices Raise Gas Hopes
by Myra P. Saefong
NATURAL GAS FINALLY HAS BROKEN OUT OF THE TIGHT TRADING RANGE IT’S BEEN
stuckinforthepastsixmonths.Butit’sdoneitthehardway,byfallingtoa
morethanthree-yearlow.However,therecouldbegoodnewsinthebadnews.
Cheapergasprices“willboostcoal-to-gasswitchinginthepowersectorand
tightenU.S.balances,limitingsupplyavailable”toincreasestoragelevels,pre-
dicts Richard Redash, head of global gas planning at S&P Global Platts.
Futures settled at $2.185 per million British thermal units on June 20—the
lowestfinishforafront-monthcontractsinceMay2016.Thatmarkedabreakout
fromtheroughly$2.30to$3.60rangeevidentsinceJanuary.Futuressettledat
$2.251 on Friday.
WarmtemperaturesinAprilandarelativelycoolMayledtoarecordcumula-
tiveApril-MayU.S.storagebuildofabout855billioncubicfeet,andJunewas
considerablycoolerthanthatmonthhadbeenayearearlier,saysRedash.All
ofthatcontributedtothegaspricedecline,alongwith“globalrecessionworries
that had impacted oil...prices too.”
ThelackofatradedealbetweentheU.S.andChinahasfedconcernsover
a slowdown in the global economy, dulling prospects for energy demand. In-
creasedU.S.liquefied-natural-gasexportstoChinaarelikelytobe“oneofthe
headlines when a final trade deal with China is reached,” says Rob Thummel,
portfoliomanageratinvestmentadvisorTortoise.“Chinaneedstoreducecarbon
emissions,andthebestwaytodothatistoreduceitscoalconsumptionthatcur-
rently represents 58% of China’s energy supply.”
Naturalgasnowrepresents7%ofChina’senergysupply,andBeijingwants
toraisethatto10%by2020and15%by2030.Todothis,Chinawouldpotentially
needtosource60.2billioncubicfeetperdayoverthenext12years,saysThum-
mel.Toputthatintoperspective,henotesU.S.shalefieldsproducealittlemore
than65billioncubicfeetaday.“Wedon’tbelievethat
Chinawillbeabletomeetitsnaturalgasdemandwith
domestic sources alone,” he adds.
TheU.S.producessomeoftheworld’scheapestnat-
uralgas,saysSimonLack,managingpartneratinvestmentadvisorSLAdvisors.
As of Friday, gas futures on the New York Mercantile Exchange, for delivery
attheHenryHubinLouisiana,weremorethan20%loweryeartodate.They
haven’t logged a yearly gain since 2016.
The low prices are “stimulating demand overseas,” says Lack, with Asia a
particularly big buyer. The Energy Information Administration reported that
dailyU.S.grossexportsaveraged9.9billioncubicfeetin2018.Itforecaststhat
thetotalwillrise28%thisyearandanadditional23%in2020.And,saysThum-
mel: “Lower natural gas prices can result in even higher demand.”
In the week ended July 12, the U.S. had 2.533 billion cubic feet in storage,
143 billion below its five-year average, according to the EIA.
Redash said U.S. demand growth will be “much weaker” than it was last
summer,andthatyear-over-yeargainswilllargelybelimitedtoexports.How-
ever,domesticproductiongrowthwillalsobemuchlower,withyear-over-year
gains at 6 billion cubic feet per day, down from 10 billion.
Alltold,PlattsAnalyticsarguesthatHenryHubpricesare“undervalued,
relative to current Nymex futures,” says Redash. “We think prices will pop
back into the former $2.50 to $2.90 [million BTUs] range later this summer,
with even greater upside risks awaiting in the winter.”
MYRAP.SAEFONGwrites about commodities for MarketWatch.
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