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While demand for natural gas is projected to reach an all-time high this winter, production is also expected to reach record levels. The interesting part of the story rests in the details and dynamics at a regional level. As always, a handful of forces within the market’s major pressure points can shed light into market fundamentals’ impact on the industry over the short and the long term.

Speaking at the Winter Outlook for Natural Gas Event hosted by Buchanan, Ingersoll & Rooney and the Chamber of Commerce for Greater Philadelphia, Natural Gas Supply Association (NGSA) Senior Vice President of Government Affairs Jenny Fordham shared several insights about what the industry can expect in the winter ahead.

According to NGSA’s 18th annual winter outlook report based on its in-depth analysis of the weather, economy, consumer demand, production and storage, the association expects neutral price pressure overall on the natural gas market in winter 2018-2019 compared to last winter. With a winter expected to be just 1 percent warmer this season compared to last year, a relatively steady economy, and just a 3 percent increase in expected demand – despite being a record amount of winter demand overall – NGSA expects neutral pressure on prices for each of these three points. Meanwhile, the lowest storage levels since the shale era began is forecasted to place upward pressure on prices, while an increase in supply of more than 7 Bcf/day due to surging production will likely result in downward pricing pressure, leading to net neutral expectations in 2018/19 compared to 2017/18.

Fordham highlighted three key considerations to keep in mind for the natural gas market that transcend this year’s winter. While the following points may not come to a head in 2019, these factors are likely to play a role in the larger scope of natural gas and energy markets in general in the years to come.

1. Changes in Demand Elasticity

In the past, as natural gas prices would fall relative to coal, operators of power generation fleet would make the logical economic decision to switch to the more price-favorable fuel source. This is commonly referred to as coal-to-gas fuel switching. At peak levels, coal-to-gas fuel switching was estimated to reach as much as 20 percent of total electricity sector demand for natural gas.

But for better or worse, those days are likely behind us, Fordham says. Because of the retirements of uneconomical coal facilities and recent growth in natural gas-fired generation, we see less fuel-switching capability in the market in the near-term.

As more coal facilities are getting retired, the level of economically-driven fuel switching declined from 2 to 3 Bcf/day just a few years ago and is now expected to be 1 to 2 Bcf/day this winter. Fuel-switching is ultimately driven by demand levels and the relative market conditions between coal and natural gas. While the flexibility of the electricity sector to fuel-switch is based on short-term economic conditions, the electric sector added significant new natural gas-fired generation over the last year.

Liquified natural gas is poised to provide an important and growing source of elasticity in the market. However, liquified natural gas is a relatively small part of the market.

2. Role of Oil/Liquids Markets in Natural Gas

Last week, oil prices rose 2 percent after China hinted a possible fiscal stimulus was on the horizon. But that crude oil price recovery may be short-lived as analysts say demand for the resource is expected to be lower than projected output.

Though daily fluctuations in oil prices may be worth only a cursory glance, oil is still worth monitoring. A considerable amount of natural gas production stems from oil- and liquids-directed drilling. Permian Basin production provides a good example. Oil markets also impact the U.S. industrial sectors’ product competitiveness around the world.

Changes in oil and liquids markets are not expected to impact the natural gas market outlook this winter, but it’s an issue to watch. Oil and liquids markets impact natural gas supply and demand levels in the U.S. Even liquids take-away infrastructure constraints have an impact on natural gas markets. Robust natural gas production in the U.S. helps provide the U.S. industrial sector with a competitive advantage around the world, but that competitive advantage also depends on worldwide oil markets. Combined with the potential impact of President Trump’s tariffs, and the oil market is certainly worth monitoring moving forward.

3. Growth in Regulatory Uncertainty

Those in the industry well know that investing in natural gas is a wise environmental decision for a litany of reasons. Compared to other fossil fuels, it represents a dramatic reduction in carbon and other emissions. It also delivers a massive footprint advantage and bang-for-your-energy-buck in terms of land use, which is among the reasons industrial consumers are installing natural gas fired power generation on site.

Yet regulatory roadblocks to infrastructure developments continue to surface and make it a challenge to take advantage of the environmental benefits of natural gas. In the Northeastern U.S., policies significantly restrict infrastructure development across the region. And driven by the Paris Climate Change Agreement, several international banks have announced plans to change their fossil fuel investments. As an example, BNP Paribas announced that it will no longer do business with companies focused on oil and gas from shale and oil from tar sands operations. This not only discounts the dramatic reduction in carbon emissions that natural gas provides against other fossil fuels, but it completely ignores the affordability, land-use and many other benefits natural gas provides as well. Meeting the world’s energy demand requires a variety of solutions that appropriately include natural gas. And right now, emerging international financial policies are essentially turning diverse market decisions into a single-issue decision about carbon emissions when energy investment decisions must be based on a variety of competitive market and environmental factors.

To view the NGSA’s entire natural gas market winter outlook for 2018/19, click here. To learn more about Buchanan, Ingersoll & Rooney’s experience and insights on the energy industry, visit the Energy Section of our website.