US physical natural gas follows futures above $7/MMBtu as fuel switching proves elusive

US cash prices for next-day flows of natural gas climbed sharply higher on April 18, with many locations trading above $7/MMBtu for the first time since the February 2021 freeze, even as demand is set to weaken over the next week.

The physical market's buoyancy follows a dramatic recent rally in NYMEX Henry Hub futures, as high prices and rail constraints inhibit the kind of gas-to-coal switching in power generation that could help temper a gas price rally.

On April 18, NYMEX Henry Hub May contract gained 52 cents to reach $7.82/MMBtu, $2.10 higher than at the start of the month, according to preliminary settlement data from CME Group. The prompt-month contract has repeatedly smashed multiyear records dating back to 2008, with the most recent trading session marking the highest point reached since September 23, 2008. The bullishness extended along the curve, with the June–November contracts flirting with $8/MMBtu and December coming in at $8.24/MMBtu on April 18.

Spot gas prices in every region of the US similarly rallied above $7/MMBtu in April 18 trading, with locations seeing gains ranging from 45-85 cents. While S&P Global Commodity Insights projected that total US gas demand will increase 1.8 Bcf, or 2%, to 97.2 Bcf on April 19, demand is expected to slide just over 8 Bcf/d to average 89.1 Bcf/d over the next seven days and down to 87.4 Bcf/d for the week after next. US gas production remains lethargic, averaging 93.4 Bcf/d so far this month, down 400 MMcf/d from March levels.

'Everything is hot right now'

Despite the dramatic run-up in natural gas pricing, experts said the typical gas-to-coal fuel switching for power generation that could moderate such a price rally may still be out of reach.

"The thing is that everything is tight – coal is tight, you would be going from the frying pan to the kettle, everything is hot right now," Phil Flynn, senior market analyst at Price Futures Group, said in a telephone interview.

US coal prices have been bullish for weeks as domestic and global fundamentals converge. Slow rail cycle times nationwide have prevented some utilities from achieving planned stockpile replenishment. Geopolitical conflict has disrupted coal vessel movements amid already low global supplies. Domestic utilities seeking to restock during shoulder season must compete with this new export demand, pushing prices higher.

As Europe searches to fill the Russia supply gap, US low-sulfur coal prices have surged.

With a sulfur content of 1.6 lbs, Central Appalachia coal is of interest to European markets and has held at the highest price in over 13 years for the past two sessions. The coal moves via CSX rails to seaborne markets via the railroad's coal export terminal Curtis Bay in Baltimore. The S&P Global Commodity Insights most recent assessment for prompt-month CAPP 12,500 Btu/lb coal was $142.50/st on April 14, the highest price since $147.95/st Oct. 6, 2008.

Currently, the fuel-switching price point for CAPP Rail is around $9/MMBtu, according to Jack Winters, manager of the North America Natural Gas Analytics team at S&P Global.

Regionally, access to different coal grades can alter the fuel switching outlook, with MISO's access to Powder River Basin coal supply lowering its expected fuel-switching point to around $5/MMBtu. However, Winters cautioned in an April 13 webinar that substantial planned coal plant retirements this year could limit switching in the MISO service territory as well.

Outlook

Technical analysis tools, such as the parabolic stop and reverse and the moving average convergence divergence, indicate that even higher prices could be ahead, at least for gas futures, Stephen Schork, principal of The Schork Report told S&P Global April 18.

"Once the parabolic SAR and MACD cross over to bearish, there is a high probability that this bull run has exhausted itself, but neither one of those indicators are anywhere close to showing signs of that," Schork said.

"From here we can go another $1 higher by the end of this week" Schork said.