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Highlights

NYMEX futures hit 37-month low at $2.185/MMBtu

Henry Hub price at $2.20/MMBtu adds 3 Bcf/d in demand

Denver — Benchmark US gas prices currently trading near three-year lows are driving an uptick in demand from the power sector this month and, if sustained, could push burns to record highs by later this summer.

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Last week, the NYMEX prompt-month contract capped off a nearly 50-cent decline over the past month, falling to a 37-month low at just $2.185/MMBtu. Cash prices at the Henry Hub have followed a similar trajectory, recently dipping to $2.21/MMBtu.

Both the Henry Hub prompt-month futures contract and cash markets were trading only marginally higher Wednesday compared with last week's lows, settling at $2.291/MMBtu and $2.315/MMBtu, respectively, preliminary data from S&P Global Platts showed.

Historically low prices are making gas the cheaper feedstock for many power generators recently, with cost ratios now favoring the fuel over coal in Southwest Power Pool South, Into Southern and PJM West. The ratio is at nearly breakeven in MISO Indiana.

US power burn has averaged 32.6 Bcf/d, or about 800 MMcf/d higher so far this month, compared with the June-to-date average last year. Higher burns have accompanied cooler-than-average temperatures, too, which are off about 2 degrees compared with last June.

According to S&P Global Platts Analytics, the arrival of even average seasonal temperatures in July and August could see power burn levels rise as much as 2-3 Bcf/d over last summer, assuming gas prices remain near current lows.

GAS-FIRED CAPACITY

The summer's uptick in gas demand from the power sector has been fueled in part by lower gas prices, but also by changes in US power generation stack over the last year.

In the past 12 months, power generators have added more than 14,000 MW of gas-fired capacity -- most of it in the PJM market. Over the same period, US generators have retired nearly 11,700 MW of coal-fired power.

Combined, the changes have made gas burns more inelastic, or less responsive to fuel price increases that could make coal or other forms of power generation cheaper.

FORWARDS

With the recent selloff in prompt-month futures and cash markets dragging down the forward curve, lower gas prices at around $2.30/MMBtu through October could dovetail with changes in the generation stack to push power burn to record highs this summer.

According to Platts Analytics, a base-case scenario for Henry Hub gas at $2.65/MMBtu would see weather-normal power burn average about 34.5 Bcf/d from July to October.

Assuming Henry Hub prices remain closer to $2.20/MMBtu, weather-normal burn would average about 37.4 Bcf/d over that same four-month period. At a $1.90/MMBtu gas price, weather-normal burn would average over 41.1 Bcf/d.

Last summer, power burn from July to October averaged 35.1 Bcf/d, thanks to higher temperatures. According to the US National Weather Service, above-average temperatures could pose upside risk for power burn demand again this year.

In a forecast published earlier this month, the agency said it's anticipating a 33% to 50% risk for above-average temperatures from July to September across large swaths of the continental US, including most of the West, the Gulf Coast states, and along the entire Eastern Seaboard.

-- J. Robinson, jrobinson@spglobal.com

-- Edited by Valarie Jackson, newsdesk@spglobal.com