U.S. electricity generators are expected to use more natural gas at the expense of coal in the coming months due to the falling prices of domestic natural gas futures.
The benchmark U.S. natural gas prices have slumped to the lowest in years in recent weeks due to a mild start to January, consistently high supply, and an outage at the Freeport LNG export facility, which has raised the volume of gas available for domestic use since the fire at the plant in June last year.
This year, Freeport LNG exports are set to return at some point this quarter, although it will likely take weeks or months to see the second-largest U.S. LNG export facility by capacity fully operational.
The Henry Hub gas prices have slumped to around $2.50 per million British thermal units (MMBtu), down from $6/MMBtu in the middle of December and more than $9/MMBtu in August 2022.
The current price is at the lowest in two years in nominal terms. But adjusted for inflation, the U.S. natural gas prices are at a 30-year-low, according to estimates by Reuters' senior market analyst John Kemp.
The low natural gas prices could weaken new drilling activity in the biggest shale gas basins in the coming weeks, as the latest rig count suggests. Despite that, overall production is not expected to slump this year on an annual basis, according to the U.S. Energy Information Administration (EIA).
The low price of gas is now an incentive for U.S. power generators to run more gas-fired units at the expense of coal to meet the upcoming summer demand. The generation mix will continue to shift away from coal, the EIA said in its Short-Term Energy Outlook (STEO) for February.
Related: Oil Prices Fall On Renewed Inflation Fears
In the outlook, the EIA slashed last week its Henry Hub spot price forecast by 30% to $3.40 per MMBtu, down from $4.90 per MMBtu in the January forecast. The Henry Hub natural gas price averaged $6.42 per MMBtu last year.
The revised outlook for Henry Hub prices is a result of significantly warmer-than-normal weather in January that led to less than-normal consumption of natural gas for space heating and pushed inventories above the five-year average, the EIA said.
Natural gas inventories will end the withdrawal season at the end of March 16% above the five-year average, the administration noted.
"After lowering our February forecast for near-term natural gas prices, the forecast share of natural gas generation for 2023 is now 39%, up from a forecast 2023 share of 38% in the previous STEO," according to the EIA.
However, more volatility in fuel costs creates uncertainty around how natural gas and coal-fired generation will respond to increased renewable generation capacity, which is set to displace additional shares of coal and, to a lesser extent, gas from the power generation mix through 2024.
U.S. natural gas prices are set to remain below $3 per MMBtu in 2023, supported by record warm winter weather and strong U.S. gas supply, Enverus Intelligence Research (EIR) said in early February.
"Unseasonably warm weather, record high supply and delays to the Freeport LNG restart inflated our end-of-winter natural gas storage estimate. This higher storage projection worsens the oversupply already expected for midyear, pushing our summer price forecast down by as much as $1/MMBtu from previous outlooks," EIR director Bill Farren-Price said.
In terms of U.S. gas supply, dry natural gas production averaged 100.2 Bcf/d in January, the EIA said in its monthly outlook, and forecasts production to hover around 100 Bcf/d for most of this year to average between 100 Bcf/d and 101 Bcf/d in 2023. Utilization at U.S. LNG export facilities is set to be slightly lower in the next few months compared with the previous forecast due to high natural gas stock levels in Europe. But U.S. LNG exports are set to rise once the Freeport facility is back online, and LNG exports will increase by 11%, or by 1.2 Bcf/d, on an annual basis in 2023 compared with 2022, the EIA says.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More