Despite the fact that some producers are increasing their dry natural gas shut-ins and retooling their operations to go after liquids, the industry is still facing a supply glut problem, which could be exacerbated later this summer as storage room becomes scarce. As a result, cash prices could easily slip back below $2, according to Evergreen, CO-based Bentek Energy.
The research firm noted that the U.S. natural gas market is facing "a summer of extremes" after the warmer-than-normal winter pushed March-ending natural gas storage inventory to a five-year high of 2,479 Bcf, 60% above the five-year average. In view of that it believes the Henry Hub natural gas cash price will fall below $2 this fall as storage bulges to capacity.
The Henry Hub made a rare appearance with a $1 handle in March and April -- recording a low of $1.83 -- before rebounding in the last few weeks. For Wednesday delivery, Henry was averaging $2.36/MMBtu. Whether the cash price has reached its near-term bottom remains to be seen.
"While substantial year-on-year demand growth may decrease the rate of injections this summer, Bentek expects U.S. storage fields to remain near full," the company said in it's Market Alert, Gas Tank Full: Henry Hub Will Re-Test Price Floor. "As a result, Bentek anticipates dry gas production to undergo substantial curtailments by the end of summer."
Even as some producers increase production curtailments, Bentek said total demand from power will need to average 6.3 Bcf/d higher than the five-year summer average while gas production will need to be curtailed 0.9 Bcf/d in non-Northeast basins for storage constraints to be avoided.
Bentek added that the steady production growth from the Marcellus, Haynesville, Eagle Ford and Granite Wash that accelerated in 2010 has easily offset declines in conventional and offshore producing areas. "U.S. dry output hit an average monthly production high of 64.1 Bcf/d in January 2012, 5.4 Bcf/d higher than January 2011 levels and 9.9 Bcf/d stronger than 2010 January output," the company said in the Market Alert. "The effects of this growth were evident well before the January high, however. Despite a colder-than-average 2010-11 winter followed by the hottest summer in over 100 years, the U.S. working gas inventory reached a five-year high at 3.85 Tcf as of Nov. 11, 2011."
To take the pressure off storage infrastructure, Bentek said weaker prices are a necessity. The firm expects Henry Hub cash to average $2.32 over the summer, with monthly average peaks as high as $2.70 at the height of the cooling season, and "as low as a $1.00-handle monthly average during the second shoulder of the summer" as demand trickles lower and storage quickly fills.