US Nat Gas price should move to $15 or above to balance market

US Natural Gas prices will have to spike propane parity rates of $15/MMBtu to encourage petroleum fuel burn this winter or to destroy industrial demand till cold weather persists.

The only way to balance a tightening natural gas market immediately is to force demand rationing through higher prices. The natural gas prices should move up to propane parity prices, which is at $15/MMBtu, according to a report by Bank of America-Merrill Lynch (BofAML).

Prices may need to move up to encourage petroleum fuel burn this winter or to destroy industrial demand till cold weather persists. While natgas stocks across the country are not yet critically low, oil parity levels would translate into NYMEX Henry Hub prices of $15+/MMBtu. US natural gas spikes also will temporarily attract LNG from abroad.

Prices of natural gas in North America have been impacted in recent days by exceptionally cold weather. The sharp price move could boost supply in the next few months, the response is unlikely to come in time to temper winter prices, especially in light of continued production freeze-offs. America is highly unlikely to run out of nat gas, as the winter season would be over in the couple of months there would be growth in the production of natural gas.

Frigid weather conditions across the country have driven up heating demand, resulting in a spike in weather-sensitive residential and commercial consumption. . On top of that, gas-fired power generation remains strong, both on an absolute as well as on a weather-adjusted basis, further tightening the market. On the supply side, production freeze-offs are currently running above 1 bcf/d, with the majority in the Marcellus and Utica regions. Combined, the unusually cold
weather has created a run on inventories and a wide storage deficit.

In the view of Bank of America Merrill Lynch, long positions on the March NYMEX nat gas contract seem attractive from a risk-reward perspective for investors. Options markets are also already starting to reflect this sharp upside risk but low deltas still offer a good risk reward.

With prompt natural gas prices spiking due to cold weather conditions and producers selling aggressively on a forward basis, the NYMEX natural gas market has moved into backwardation and near-dated prices are now trading above natural gas prices in 2020. This has widened the backwardation in winter contracts to extreme levels compared to the last few years.