Nukes down, coal up and the risk US natural gas prices double again
May 19, 2022 11:38 AM ET
Peabody Energy Corporation (BTU),
ARLP,
CEIX,
ECIFFURA,
UNG,
XLE,
NG1:COM,
EQT,
CHK,
RRC,
SWN,
USOBy:
Nathan Allen, SA News Editor
30 Comments
Electricite de France (
OTCPK:ECIFF) cut the company's nuclear power production guidance for the fourth time this year, reducing 2022 targets from 305TWh (midpoint) to 290TWh (midpoint). In Early January, the company expected to generate 345TWh of power. With Thursday's update, 2022 guidance has been reduced by ~16%. Given that France generates more than 60% of its power from the carbon-free fuel source (
URA), reduced nuclear output will result in elevated demand for natural gas and coal.
With Europe snapping up LNG cargoes to offset reduced nuclear output, while also attempting to restock inventories before winter, Asian utilities have relied more heavily on coal. The predictable outcome is that seaborne thermal coal prices have rallied. Argus reported the highest-ever price for a cargo of thermal coal traded hands overnight at $442.50 per ton.
As seaborne coal prices have increased, exports from US companies like Alliance (NASDAQ:
ARLP), CONSOL (NYSE:
CEIX) and Peabody (NYSE:
BTU) have increased as well. The result is that in-basin pricing, the price paid by US utilities, has risen dramatically in recent months. In many cases spot domestic pricing has
risen 200-300%. Higher coal costs, in concert with anemic natural gas (
UNG) production growth, have lifted US natural gas prices by over 100% year to date.
Most energy investors (
XLE) have a framework for "goal posting" oil price forecasts. In an oversupplied market, the price gravitates to the "cost of production." Most agree that the current cost of production is ~$50-60 per barrel, given shale breakevens. However, in an undersupplied market, the price of oil rises until production increases meet demand. If production doesn't increase, the price will rise until demand begins to fall. There is much disagreement on the price level at which demand is destroyed; however, most agree on the framework for setting the price and clearing the market under such a scenario.
In the case of natural gas (
NG1:COM), the "goal posts" are less clear. In an oversupplied market, natural gas prices tend to gravitate to the cost of supply. In the US that has been ~$3.00/Mmbtu ever since the shale revolution reached scale.
However, few agree on the framework for setting a clearing price in an under-supplied market; perhaps because the US has not seen an under-supplied natural gas market in over a decade. But given significantly increased export demand and anemic supply growth, analysts are beginning to consider the clearing price for natural gas in a sustained, under-supplied market.
When natural gas reaches the hub, or the exchange, a trader generally has three options. Sell the gas to a utility or other domestic consumer on the spot. Sell the gas for delivery at a future date, and pay a small fee to store the gas in the meantime. Or sell the gas to an export market (usually an LNG export facility).
When there's ample supply of gas to meet spot and export demand, the spot price is set by future expectations of price (e.g., cost of supply) and storage cost. However, when there's not ample supply to meet spot and export demand, like with oil, the price needs to rise until demand is destroyed. Given that LNG exporters are earning ~$30/Mmbtu for gas sales in Europe, and given ~15% conversion costs (the gas consumed in the process of liquifaction) and given ~$2.00 transportation and regasification fees, export demand would not likely be "destroyed" until US natural gas reached ~$20/Mmbtu.
US natural gas at $20/Mmbtu sounds like a very high number, and it is. However, it's the price that makes a molecule of gas in the US is worth the same to a trader as a molecule of gas in Europe. Meaning, there is no arbitrage trading opportunity between the two markets, and no demand from a trader to buy gas at the hub.
Following the creation of the US LNG export market in middle of the last decade, and up until Europe's recent acute shortage, it was exactly this
arbitrage relationship (henry hub + liquefaction costs + transport = international gas prices) that set US and global gas prices. The only difference was that before 2021, excess US natural gas supply served to reduce international prices. Now, given an international and potential domestic shortage, this arbitrage relationship would serve to lift US prices to international levels.
The "export arbitrage" price is a framework for setting price in an under supplied market, and not a forecast. If US natural gas production responds to current high prices, the market will balance and prices will fall. However, if US natural gas production does not rise (
EQT) (
CHK) (
AR) (
RRC) (
SWN), and rise quickly, US consumers may be looking at home heating costs and electricity bills doubling once again.
Electricite de France (ECIFF) cut the company's nuclear power production guidance for the fourth time this year, reducing 2022 targets from 305TWh (midpoint) to 290TWh (midpoint)
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