Chicago futures $1.50/MMBtu over last year
Gas held bulk of Midwest thermal load during summer
Denver — Strengthening of Chicago natural gas prices, particularly for winter futures, looks to incentivize gas-to-coal switching for power generation in the US Midwest this winter, a reversal from much of the summer when low prices led to gas capturing the lion's share of thermal load in the region.
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Register NowGas' share of the thermal load in the Midcontinent Independent System Operator and Southwest Power Pool saw steep gains this summer from the prior winter as Chicago prices fell. Chicago averaged $1.97/MMBtu last winter, pushing gas' share of the thermal load in MISO and SPP to 49.2%, according to data by S&P Global Platts Analytics.
However, price declines since the start of the year, particularly those seen in March and April, led to coal to gas switching the first part of this summer.
Specifically, Chicago dipped as low as $1.55/MMBtu in June and hovered between $1.55/MMBtu and $1.66/MMBtu from March to June. Summer-to-date prices have averaged $1.74/MMBtu. This encouraged substantial coal to gas switching, which peaked in April with gas gaining 61% of MISO and SPP's thermal share.
August and September reversed the trend of strong gas generation as the rally at Henry Hub elevated Chicago cash prices as well, encouraging gas to coal switching. Platts Analytics expects this trend to continue into the winter as prices are expected to substantially rise thanks to a tighter market.
Chicago futures for the winter are currently averaging $3.28/MMBtu, more than $1.50/MMBtu above both last winter and this summer. Chicago futures for the winter have averaged as high as $3.34/MMBtu and as low as $3.17/MMBtu during September.
The past seven days have averaged 8 cents/MMBtu above the seven days prior. Higher prices should dampen gas' share of the thermal loads and gas burns this winter. Platts Analytics expects stronger prices will lower power burn to 2.4 Bcf/d in the Midwest this winter, down from 2.8 Bcf/d last winter.
Additionally, the increase in coal demand will trim coal inventories, potentially leading to increased production as coal prices rebound from recent levels. This relationship is particularly noticeable with coal supply from the Illinois Basin.
If gas prices were to increase to $3.50/MMBtu for five months, Illinois Basin prices could be expected to rebound to $2/MMBtu, or $46/mt, according to Platts Analytics. Other bituminous coal prices are likely to follow suit, but due to more elastic supply, increases in Powder River Basin prices would be smaller.
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October 01, 2020 at 04:34AM
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ANALYSIS: Higher Chicago natural gas prices look to increase gas-to-coal power switching this winter - S&P Global
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