Excess hydroelectric supplies in the West should cut natural gas demand by one-third through August, according to a market alert released Wednesday by energy consultant Bentek Energy LLC. Forward gas prices in the western United States and Canada are overvalued as a result of demand loss that Bentek calculates to be 295 Bcf.
Abundant hydroelectric supplies are the result of heavy snowfall and precipitation this winter and early spring in the West, including the Pacific Northwest and California/Southwest regions. This has brought early runoff at lower elevations and "exceptionally high levels" of hydropower this year, the Evergreen, CO-based consultant said.
Predicting that the situation will continue through most of this summer, Bentek said the lost gas demand will be the equivalent of about 7% of U.S. gas storage capacity. Bentek predicted implications for both gas and electricity wholesale prices in the West as a result.
Currently, oversupply conditions in the natural gas sector will be exacerbated beyond the West in upstream markets, the report predicted, citing lower western gas demand for power generation reverberating back to the national gas supply-demand balance this spring and summer.
Bentek concluded that Henry Hub prices could be impacted by the robust hydropower season, citing forward curve averages of $4.15/MMBtu for the spring and summer months and the lost generation-based demand for gas driving down the Henry Hub average to $3.95/MMBtu.
There could eventually be some gas well shut-ins resulting, given that even without an additional 295 Bcf of lost gas demand Bentek has been predicting market oversupply. Now, the gas storage situation could put "further downward pressure on prices" and add to the potential for shut-ins, Bentek said.
"West storage inventories are running well below the five-year average and year-ago levels and could absorb some of the displaced gas," Bentek said. "However, both California and the Pacific Northwest are also pushing back on supply from other regions."
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