The US Natural Gas Prices Rising

Natural Gas prices in the United States rose sharply following a recession last year, limiting gas use by electricity generators this summer and encouraging a shift to coal combustion. Front-month futures rates for gas supplied at Henry Hub have risen to $3.00 per million British thermal units, nearly 80% higher than a year earlier. Since accounting for performance disparities, gas has once again become more expensive than coal.

It has allowed power producers to operate gas-fired units for fewer hours and leave more of the market for coal-fired alternatives. On the other hand, coal-fired power plants are forecast to increase their generation share to 26% by 2020, up from 22% in 2020. In the three months between June and August, the EIA predicts that electricity generators will consume an average of 35 billion cubic feet (bcf) of Natural Gas per day, down from 40 bcf per day in the same timeframe last year.

However, coal combustion is expected to increase to 160 million short tonnes in the first three months of this year, up from 137 million short tonnes in the same period last year. Due to an enormous build-up in gas supplies during the outbreak last year, ultra-low prices stifled new gas well exploration, helping to tighten the market in the second half of 2020.

Then, in February, after a mild start to the winter, temperatures plummeted well below average, with freezing temperatures in Texas eradicating the remaining gas surplus. Natural Gas inventories were 3% lower last week than the prior five-year seasonal average, down from an 18% surplus in June 2020. As a result, futures prices have risen to the 78th percentile of the five-year average from 2016 to 2020, discouraging more inventory erosion and encouraging further well drilling.