Whoa! That was my reaction upon checking the front-month Henry Hub natural gas futures price this morning and noting that the December contract had hit a price of $4.92/mmBTU overnight. Since that contract finished trading for the month of October at $3.30/mmBTU, the move in the past week–one that I predicted in my Forbes column last week–has been extraordinary. As of this writing the front-month contract is trading at $4.51/mmBTU, indicating that this price move has staying power.
Natural gas prices are driven by weather, especially in the Northeast, and it is unseasonably cold here in New York City today. Also, the forecast calls for bitter cold temperatures and snow tomorrow here in the Big Apple, a rarity before Thanksgiving and a prospect that only bullish energy traders are relishing.
As always, the more intriguing quotes are in the forward-months’ contracts, though, not the front-month contract. I am currently seeing the March 2019 contract quoted at $4.13/mmBTU with December above $4.50/mmBTU and January above $4.40/mmBTU. So, the prospect of an entire winter of natgas prices in excess of $4.00/mmBTU is upon us, and that will have an inflationary effect on the broader U.S. economy.
The recession in natural gas prices that held from the beginning of 2015 until September 2018 seems to have colored some market observers’ perception about America’s needs for the fuel. The winter of 2013-2014 and the majority of the winter of 2009-2010 saw natgas prices consistently above $4.00/mmBTU, and yet total U.S. natural gas consumption rose steadily in both 2010 and 2014.
The real tipping point driving the stupendous move in natgas prices in the past week came in 2017, though. Puzzlingly, after seven years of steady growth from the crisis-low in 2009, the amount of natural gas consumed by U.S. electricity producers declined 1.2% in 2017. Electric utilities are the single-largest consumer of natgas–representing about 35% of total consumption–in the U.S. and tend to act as a marginal consumer.
So, perhaps some in the marketplace thought that 2017 was a watershed year in the U.S.’ transition to a country in which all power is generated from the sun, wind and the combustion of hemp. Uh, no. The winter of 2016-2017 was an unseasonably mild one, with NYC heating degree days 20% below normal in December and January. That lack of seasonal demand exerted further downward pressure on already-pressured natgas prices, and producers cut back on 2017 and 2018 capital expenditures budgets as a result.
Fast forward to 2018 and the EIA’s data show that electric power producers have dramatically increased natural gas consumption. For full-year 2018 the EIA forecasts electric utility natgas consumption to increase 10%. The most recent data point for electric utility natgas consumption–August–showed a scorching 16% year on year increase in consumption from electricity producers, and July’s year-on-year growth was actually even higher than August’s figure.
So, the seeds of this week’s surge in natgas prices were planted last year and I believe the benefits–for those long natural gas–will last well into 2019.
I have said this in my prior Forbes columns on natgas and I will repeat it today. In an overall stock market that is getting hammered by fears of inflation–occurring again today after a terrible October for the bulls–investors should own shares in companies that benefit from inflation. Surging natgas prices certainly fit that bill, and I continue to recommend Antero Resources, Range Resources, EQT Resources and EOG Resources as the most attractive natgas plays.
Also, remember that natural gas is often produced as a by-product of crude oil exploitation. So as the oil market looks set to post a gain in prices Wednesday after its incredibly-hyped 12 consecutive day drop/crash/implosion, remember that oil exploration and production companies are getting a not-so-hidden benefit from higher natgas prices, too.