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Low storage, cold forecast may disrupt US coal, gas markets this winter

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Workers remove a fallen tree from a road and repair power lines during a March 2018 winter storm, in Norwell, Mass. The potential for another cold winter could continue to push up the price of coal and natural gas in the coming weeks.
Source: Associated Press

U.S. natural gas storage and utility stockpiles of coal are at near-term record lows as at least one weather outlook expects power generators to be hit with the coldest winter in five years.

Natural gas stocks ended refill season at the lowest level in more than a decade and a hot summer whittled down utilities' stockpiles of coal to four-year lows. Concerns over the low level of natural gas in storage has already spooked the futures market with traders sending the contract for December delivery up to a four-year high near $5/MMBtu on Nov. 14, only to retreat below $4/MMBtu the next day.

Both commodities could get a boost in demand from what may be the coldest winter since 2013-2014, according to Todd Crawford, a senior meteorological scientist at IBM Business' The Weather Company.

"The winter is expected to have the coldest weather, relative-to-normal, across the more populous areas of the U.S., which has clear implications for increased heating demand," Crawford told S&P Global Market Intelligence. "This is the first winter since 2009-10 that has all of the ingredients for a very cold and snowy winter in the eastern U.S., and we feel that the cold and storminess will be especially notable later in the winter."

He expects a warmer-than-normal winter across the northern and western U.S. and a colder-than-normal winter across parts of the southern and eastern U.S. A weaker-than-normal polar vortex and other factors are also expected to increase the chances of a colder winter across the eastern and central U.S., Crawford added.

Coal miners sense utilities needing coal

Sensing that utility buyers may be getting nervous about their coal supply, producers are likely to be bullish with their coal offers in the coming months, according to Matt Preston, research director for North American coal markets at energy consultant Wood Mackenzie.

"I think the chance of something spiking both coal and gas prices is probably higher than it's been in the past couple winters," Preston said.

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The potential for increased coal buying generated optimism on coal company earning calls where executives have reported success in securing new and longer-term supply contracts. Consol Energy Inc. executives, for example, reported utilities are showing more willingness to enter into multiyear contracts for coal from the company's Pennsylvania mining complex. Limited investments in mines and a strong pull from export markets has pressured supply.

Illinois Basin coal producer Foresight Energy LP President and CEO Robert Moore recently warned that a hard, long winter could catch some electric utility customers unprepared.

"When I take a look at the inventory positions of certain of our utility customers, I'll tell you, we've been scrambling to keep people in coal," Moore said on the partnership's third quarter earnings call. "We've got some folks out there with less than 10 days of coal on the ground, and I'll tell you phones constantly ringing about getting coal over to the plants. It's a serious situation."

With most utility coal stockpiles still generally offering over 70 days of supply cover, the lights aren't about to go out, said Joe Aldina, director of U.S. coal research for S&P Global Platts. But October coal burns were already trending higher and a colder winter could definitely be a boon to U.S. coal producers.

"I think you could add several million more tons of demand in both what is remaining of the fourth quarter this year and in Q1'2019," Aldina said. "I do think it will spur more buying of coal. The question is, will producers be able to step in and provide coal to buyers at these levels of extra demand."

Much of the additional tonnage, Aldina said, would likely come from the lower-cost Powder River Basin coal region. There could be some potential for Illinois Basin coal producers to sell additional tons into the market as well.

Utilities, accustomed to a ready supply of coal in the U.S, do not seem to be panicking. WEC Energy Group Inc., for example, has not changed inventory targets for individual plants dramatically, said spokeswoman Amy Jahns.

"There is a lot of supply available and we don't anticipate any issues meeting load demands this winter," Jahns said in an email.

Natural gas demand reshaped by exports

The gas utility industry is confident that U.S. producers can flow enough supply to meet winter demand without a major price disruption. But several market analysts are warning their clients to brace for a gas price shock when winter rolls in. The 3.2 Tcf of gas in storage, the lowest winter start in 13 years, may not prove to be sufficient to meet peak demand, they say.

In their outlooks for winter 2019, trade groups for U.S. gas marketers and gas utilities agreed that expanding shale gas production from Appalachia and Texas' Permian Basin will allow utilities to rely less on stored gas — which is at low levels not seen since 2005 — and more on new gas from pipelines to meet their fuel needs.

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But some equities analysts and consultants, including B. Riley FBR Inc. oil and gas analyst Rehan Rashid, said LNG exports and Mexican gas demand have reshaped the gas market in poorly understood ways. Rashid told his clients in October that exports create demand for gas that is hard to shut off, even if gas is needed for homes and businesses.

"We believe the demand side has/is becoming stickier," Rashid said. "As a result, duration and magnitude of price signal needed … will have to be stronger than what the market currently believes."

Switching to coal will become less and less an option for power producers, Rashid said. There are far fewer coal power plants with less coal in storage this winter to be expected to step in to serve as a relief for power producers as gas prices climb. "Gas-to-coal switching is not scalable enough to truly cap movement in gas prices over a reasonable time frame," Rashid said.

Rashid's "sticky" demand model prompted him to raise his 2019 gas price forecast from $2.88/Mcf to $3.50/Mcf and he is not alone in predicting higher prices.

"With SE/TX storage limited in its ability to meet sustained, elevated demand given current low stockpiles, and with elasticities in the power sector reduced by structural shifts in the generation stack away from coal to gas, the destruction of LNG exports and exports to Mexico could be the final market balancing mechanism in the event more supply needs to be retained domestically," the market analysts at PIRA Energy Group said in a Nov. 13 note. "Shutting off either demand source won't come cheap."

PIRA, a unit of S&P Global Platts, believes Henry Hub prices could peak at $10/MMBtu on peak winter days.

Any market skittishness is overdone, Barclay's commodities analyst Samuel Phillips said Nov. 7. Production will again exceed demand and, outside of a few peak days, expanding shale gas production from both Appalachia and "free" gas from the Permian Basin's shale oil wells will cap 2019's prices, Phillips said. Further, gas-to-coal switching is still an option, according to Barclays.

"Beware the weather-driven risk premium in natural gas markets, as the price support it yields can disappear just as quickly as it emerged," according to Phillips.

PIRA Energy Group, S&P Global Platts and S&P Global Market Intelligence are all owned by S&P Global Inc.