Saturday, July 27, 2019

"Unstable Gases: Market Shocks and Qatari LNG"

In the U.S. prices have collapsed, see after the jump.
From Winton's 'Longer View', June 2017:

The gas market has experienced many shocks stretching back into the 19th century.
One notable aspect of the current diplomatic tensions between Qatar and its Arab neighbours has been the relative poise of natural gas spot prices. The Gulf state accounts for a third of LNG exports, and LNG in turn makes up approximately a third of total international trade in natural gas. It is early days, however, particularly as commodities traders have been sufficiently concerned to route LNG cargoes around Africa rather than through the Suez Canal, and to charter smaller ships to mitigate the impact of potential holdups.

Previous market disruptions include faulty pipelines in 19th century Pittsburgh, the machinations of energy companies like Enron in the early 2000s, and natural disasters like Hurricane Katrina in 2005. In the aftermath of Katrina, natural gas prices doubled. There has been a combination of infrastructure investments, source diversification and new legislation during the market’s existence. But a cursory glance at the range of prices over the last 10 years suggests the current stasis may not last for long.
The Explosive Properties of Pennsylvanian Gas (1880s)
In the early days of natural gas, rudimentary pipeline technology caused frequent disruptions. By virtue of its proximity to the Alleghany gas fields and motivated by a desire to reduce its air pollution, Pittsburgh was the first major city to adopt natural gas on a large scale. But its pipelines were beset by constant leaks, fluctuating pressures and explosions. One explosion levelled an entire city block, sparking a riot. Such unreliable supply prompted a partial return to coal, but also brought about innovative safety features and the auxiliary production of coal-oven gas, which helped smooth supply and demand for natural gas.
The Disunited States of US Gas (1954)
Ill-conceived legislation has sometimes hampered supply. Following the 1954 Phillips Decision, federal controls imposed on the US interstate gas market kept interstate prices far below their market value, fuelling demand while discouraging drilling and exploration. This led to chronic shortages in non-producer regions. By the mid-1970s, thousands of schools and factories had to close for want of gas. Meanwhile, intrastate markets in producer regions were well supplied and highly lucrative, leading to far faster development of local distribution networks. The interstate shortages also expedited the development of LNG import facilities along the East Coast, ultimately allowing the United States to avoid a supply crunch during the booming 1990s.

The Smartest Guys in the Room (2000)
When El Paso and its affiliates withheld natural gas to California during the state’s power crisis in 2000, they drove Southern Californian gas prices to five times the levels seen elsewhere, increasing the differential in prices along the pipeline from $1 to $50. Californian officials estimated that El Paso’s actions drove California’s gas and power costs higher by $3.7bn. Together with energy company Enron’s malfeasance, El Paso’s actions highlighted the dangers of overzealous energy deregulation, resulting in greater levels of regulatory oversight....

On Thursday the EIA reported that U.S. electrical utilities had a record natural gas power burn:

In the News:
United States sets new daily record-high for power burn
The United States set a new record for natural gas consumption by electric power plants (power burn) of 44.5 billion cubic feet per day (Bcf/d) on Friday, July 19, according to S&P Global Platts. Since July 1, 2019, U.S. power burn has exceeded the previous record of 43.1 Bcf/d―set on July 16, 2018―on five days: July 10 and July 16–19. Much higher-than-normal temperatures, structural changes to the power sector (particularly in the Northeast), and low natural gas prices all contributed to increased natural gas consumption by electric generators.

Higher electricity demand for space cooling in the past week was the main driver of increased natural gas-fired power generation as a record-setting heat wave affected much of the Lower 48 states. Although the hottest temperatures occurred over the weekend, most states east of the Rocky Mountains experienced warmer-than-normal weather in the days leading up to the heat wave. From July 16–21, the average maximum temperature exceeded 85 degrees Fahrenheit (°F) in most parts of the country; furthermore, average minimum temperatures, particularly in the Midwest and Northeast, were 8°F–10°F higher than average, resulting in increased cooling demand during off-peak periods.
Another contributing factor to the record power burn was relatively low natural gas prices, which averaged $2.33 per million British thermal units (MMBtu) from July 16–21 at the Henry Hub in Louisiana, according to Natural Gas Intelligence. So far this summer, Henry Hub prices have averaged $2.34/MMBtu, 19% lower than during the same period last year....MUCH MORE
And yet, despite this, natural gas futures settled at 2.1510, getting closer to the seldom-breached $2.00 line and threatening the 2016 multi-decadal lows:

However!! Commercial users really began ramping up their to-that-point modestly long position in the futures in the third week of May and haven't stopped accumulating.
Speculators can be right on the direction of prices from time to time but in the long run the commercials must be right or they go bankrupt and the game ends for everyone.