Hot temperatures, cheap gas drive power burn to pre-summer highs

Denver — Gas-fired power generation to support cooling demand is hitting record pre-summer highs this season, fueled by low gas prices and sweltering temperatures in a trend that appears likely to accelerate through July and August.

Already this month, gas demand from US generators has topped 38 Bcf/d on three occassions – levels not previously recorded in early or even mid-June. On June 17, gas burns were down from earlier highs to the 33 Bcf/d area where they are forecast to remain through the weekend before rising to more than 38 Bcf/d again next week, a short-term forecast from S&P Global Platts Analytics shows.

Strong pre-summer burns have been fueled at least in part by low gas prices.

On June 16, cash prices at the Henry Hub tested new lows, sinking to just $1.38/MMBtu – the benchmark index's lowest in over 20 years. The spot market had rebounded about 10 cents on June 17, trading into the upper $1.40s/MMBtu, preliminary settlement data from S&P Global Platts showed.

Forwards markets are anticipating lower prices to endure through the summer. On June 16, the June, July and August forward strip settled at an average price of just $1.60/MMBtu, On June 17, NYMEX July futures contact only added about 2 cents on the day, settling at $1.638/MMBtu, Platts data showed.

Elevated temperatures this month are also helping to drive recent power burn demand.

Ealier this month, population-weighted temperatures in Texas, the Southeast and portions of the Midcontinent climbed into the low- to mid-80s Fahrenheit..

Blistering hot weather is likely to return to those same regions, and much of the Lower 48 states by later this summer, according to a recent three-month outlook published by the US National Weather Service. In fact, over the balance of June, July and August, every regions but the upper-Midwest will see an elevated probability for above-average temperatures, with vast stretches of the western US, from Oregon to Texas, expected to see 50%, 60% and even 70% probabilities for hotter weather, the forecast shows.

Thermal share

In June, gas share of the US thermal load is averaging about 67% – a threshold where its likely to remain at its least – through July and August, a recent analysis published by Platts Analytics shows.

In addition to low forward gas prices, which should keep thermal dispatch economics near month-to-date levels, gas share of the electric load could potentially see a boost from declining wind generation.

Over the past five years, US daily wind generation in July and August has averaged about 15% below June levels. Those declines have ranged from as little as 3% in 2015 to as much as 29% in 2018. In ERCOT, MISO and SPP combined – where much of the US wind capacity is installed – wind output in July and August 2018 underperformed its June average by nearly 35%.

Outlook

A recent forecast from Platts Analytics shows US gas-fired power burns edging up to levels similar to those seen last summer, averaging about 41 Bcf/d in July and the upper 40 Bcf/d area in August. The forecast assumes gas prices below $2/MMBtu, accompanied by 10-year average temperatures.

More recent data suggests that gas prices could remain significantly lower than previously anticipated. Assuming hotter-than-normal temperatures and lower wind generation also prevail, its likely that US power generators will set new record daily burns this summer – potentially above 46 Bcf/d.