Natural Gas Price Outlook - Part 2

Find out why the outlook for natural gas supply alongside electricity demand could support prices amid the COVID-19 pandemic. 

By Steve Hendrickson

Previously, I discussed how falling U.S. natural gas supply alongside electricity demand that remains relatively unchanged, despite the economic slowdown related to the coronavirus (COVID-19) pandemic, may set the stage for improving natural gas prices later this year. A few days ago, I saw something that made me rethink that and I decided to dig a little deeper.

The article mentioned U.S. Energy Information Agency (EIA) data from its Hourly Electric Grid Monitor, which showed a significant reduction (approximately 15%) in total U.S. electricity demand since the beginning of the year. The explanation was that social distancing and “stay-at-home" orders were reducing overall demand. Noticeably absent, though, was any consideration of the normal seasonal fluctuation in electricity demand. Electricity demand typically declines in the spring due to rising temperatures before increasing when summer heat sets in and air conditioning ramps up.

I confirmed that demand through April 12 is down about 12% compared to January, and then I took a look at historical total U.S. electricity demand using EIA's database. The graph below shows total electricity consumption from all sources by month for each year since 2001 expressed as a percentage change from that year's January consumption. It's clear that typically we experience an electricity demand reduction in April of something between 9% and 18%. The 12% we've experienced so far seems to be very near the average.

(Source: U.S. Energy Information Administration)

Electrical generation accounted for about 35% of natural gas usage in the U.S. in 2018, and it's likely that has increased somewhat since natural gas continued to gain market share from coal in 2019. We'll take a look at some of those other uses in future commentaries, but as far as electricity demand is concerned, the pandemic doesn't appear to have impacted total natural gas consumption unusually and electricity providers haven't yet reduced their earnings guidance to reflect an impact on their business.

THIS ARTICLE WAS PUBLISHED IN THE APRIL 14, 2020 ISSUE OF THE RED WEEKLY E&P UPDATE NEWSLETTER

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About the Author:

Steve Hendrickson is the President of Ralph E. Davis Associates, an Opportune LLP company. Steve has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, Steve possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Steve is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He currently serves as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.

Steve Hendrickson

PresidentRalph E. Davis Associates

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