What lies in store for natural gas prices in 2020 and beyond?
Natural gas accounts for almost a quarter of the world’s primary energy demand. A swell of supply has depressed prices in 2019 but a slower global economy threatens to dampen demand growth
With companies and governments around the world racing to find cleaner, more sustainable sources of energy to tackle air pollution and limit greenhouse gas emissions, natural gas is the fastest-growing fossil fuel and already accounts for nearly a quarter of power generation.
Natural gas is found embedded in cracks and spaces in between sedimentary rock, which can then be drilled out. It can also form in smaller pores in shale formations, from which it is extracted using a process called hydraulic fracking, where water, sand and chemicals are pumped down at high pressure.
Colourless and odourless, natural gas emits around half of the carbon dioxide that coal does.
Gas and the green revolution
Governments around the world have to juggle the need to meet their commitments under the Paris Agreement on climate change that would limit the rise in average global temperatures to 2 degrees by the end of the century, with the need to supply power to homes and industry alike.
“Natural gas can contribute to a cleaner global energy system. But it faces its own challenges, including remaining price competitive in emerging markets and reducing methane emissions along the natural gas supply chain,” says Fatih Birol, executive director of the International Energy Agency.
The burning of fossil fuels accounts for around two-thirds of total greenhouse gas emissions each year. The IEA estimated that energy-based emissions rose by 1.7 per cent last year.
Supply goes global
One of the drawbacks of relying on natural gas in the past was the fact that, unlike other raw materials such as iron ore, copper or wheat, it was very much constrained by the geography of the pipelines that carried it. But not any more.
The advent of liquefied natural gas (LNG), where the gas has been super-cooled for loading onto specialised tankers, means a producer nation can get their exports to the international market in large amounts and nowhere has this been more obvious than in the United States.
Cheap US gas has led to copious exports of LNG that have comfortably outpaced demand this year, particularly as the global economy has slowed and consumers have curtailed their purchases.
According to US government statistics, LNG exports will increase by 30 per cent next year, compared with this year but, rather than being used, much of this gas has ended up in storage, thereby creating a large overhang of supply that the world may struggle to mop up, especially if global economic growth lags.
S&P Global Platts, a price-reporting agency, notes benchmark US 2020 gas futures prices have struggled to rise much beyond $2.50/MMbtu this year.
“With demand fragile, storage at record high levels, and bloated supplies seemingly paying little heed to market fundamentals, 2020 is shaping up to be a continuation of the weak price environment that characterized most of 2019,” Andrew Hill, Head of EMEA Gas and Power Analytics at S&PGlobal Platts, says.
“Exacerbating this oversupply dynamic from 2019 will be the fact that winter 2020 will see not only continued resilience in US LNG inflows but also more Norwegian production,” he adds.
Natural gas had a bumper 2018, when global demand hit a record high last year, according to the International Energy Agency, and will continue to boom, led by consumption in fast-growing Asian economies and, in particular, China, where there is a push to cut dependence on coal for electricity generation in favour of gas.
If the natural gas market is still dealing with a persistent supply overhang once the winter is over, even strong demand might not mean higher prices. Morgan Stanley said recently it expects no real pick-up next year and, looking further out, projects a 40 per cent drop in global gas prices over the coming decade, as the quest for greener energy heats up.
“We expect natural gas prices over the next decade to average nearly half the level of the past decade, transforming the landscape within energy and utilities, and beyond," says Devin McDermott, an equity analyst and commodities strategist covering oil and natural gas for Morgan Stanley Research.
Add to that the drop in prices for renewable energy sources and suddenly natural gas is competing with solar and wind power as consumers seek out cleaner sources of power.
As essential as natural gas is to anything from running one home to powering millions of homes, the price is highly volatile. It responds to supply and demand, which in turn depends on the weather more often than not. A warmer-than-expected winter, or a sudden cold spell, a heatwave in summer or a period of high wind can all send the price tumbling or soaring with little warning.
So far in 2019, the price of natural gas has fallen by around a third and, depending on the market, is not far off multi-year lows in some cases. EIA forecasts the Henry Hub spot price to average $2.45/MMBtu in 2020, down 14 cents/MMBtu from the 2019 average.
AccuWeather is predicting a harsh start to the European winter this year, with fierce storms expected to batter the British Isles, Scandinavia and the north of the continent, while the east and further south will likely have a milder few months in store.
In the US, where most homes get their heating courtesy of natural gas, the EIA is predicting a drop of 1 per cent in residential gas bills this winter as temperatures are likely to remain above average.
Producers usually counter a weak price environment by temporarily, or permanently, shuttering facilities with higher production costs. This month has seen Chevron, the second-largest US oil and gas producer, announced write-downs of $10-11bn this quarter, largely related to its shale gas operations.
This might make for glum reading for oil and gas producers and their shareholders, but consumers generally cheer lower energy prices, as do politicians.
What do the pro-investors think?
There are only a handful of natural gas-focussed hedge funds after a string of closures in recent years, due to poor returns and high volatility. However, those asset managers that are involved in trading gas futures seem to be less pessimistic about the outlook for next year than many of those in the industry itself.
Weekly figures from the US Commodity Futures Trading Commission which, among other things, monitors changes in positions held by various investment groups in a number of raw materials futures and options, show that money managers have given natural gas something of the cold shoulder for most of this year, until recently.
Having been overwhelmingly bearish this year fund managers currently hold a tiny net long position – one that assumes prices will rise – of 300 contracts in benchmark US Henry Hub natural gas futures for the first time since the start of 2019.
This suggests that, at least in theory, there is a belief among the asset management community that there is cause for modest optimism in the natural gas market over the coming year.
How can I trade natural gas?
Given its historically high volatility, natural gas trading isn’t for the fainthearted, or the inexperienced. However, there are a number of ways to get involved in the market.
One of the most commonly used is via natural gas futures that are traded on an exchange, such as US New York Mercantile Exchange Henry Hub futures, named after the Louisiana pipeline that serves as the official US delivery point for physical natural gas, or on the InterContinental Exchange in Europe, which offers trading in both UK and Dutch gas futures.
However, not everyone will necessarily want the exposure of a futures contract, which involves agreeing to buy or sell a set amount of the underlying asset by a certain date at a certain price, as this may result in having to take physical delivery.
A keen speculator might want a simpler means of accessing the market, such as contracts for difference, or via an exchange-traded fund, derivative instruments which essentially will give a trader exposure to an underlying benchmark price but none of the risk of delivery or storage of the asset.
If natural gas is cheap, should I buy it?
“Buy low, sell high” is the mantra of any trader. Weaker global growth, hefty oversupply and warmer winter weather in the northern hemisphere could act as fairly strong headwinds to natural gas prices next year.
Also, competition from ever-cheaper renewable energy sources, such as solar, wind and hydro-power could undercut some avenues for demand growth for natural gas.
But, lower prices often encourage an improvement in consumption. And Asia’s big guns, China and India, are set to drive demand growth over the coming five years.
The push for cleaner, greener sources of fuel will encourage more switching to natural gas from coal for power generation, especially in China but also elsewhere, as governments seek to improve air quality and lower greenhouse gas emissions, which in turn bodes well for natural gas in the longer run.
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