Natural gas storage injection rates have been more bearish than the market understands, and gas prices may need to fall over the next two months to lead consumers to burn more, according to Lehman Brothers’ energy analyst Thomas Driscoll.
In the latest Lehman Oil & Gas Update, Driscoll noted that the 74 Bcf injection for the week ending Sept. 6 was “far higher” than his estimate of 60 Bcf. The analyst’s estimate assumed that injections would run 1 Bcf/d below normal seasonal averages, adjusted for the weather. Instead, the adjusted rate was 1 Bcf/d above historic averages, continuing a pattern seen in the past few weeks as gas prices rose.
“Over the remainder of the injection season, we believe that we need to see injection rates fall 1-1.5 Bcf/d below historic, weather-normalized, seasonal averages to keep working gas storage levels from exceeding physical capacity of an estimated 3,300 Bcf by the end of the refill season (nominally Oct. 31),” the report stated. “We think gas prices may need to fall, perhaps sharply,” for consumers to respond. “Consumers ability to reduce gas consumption as prices rise has important implications for longer-term natural gas prices as well.”
Typically, gas-fired power demand and slower injection rates have been boosted by reduced operating rates for nuclear, coal and hydro power producers, he said. In the past five years, “seasonally normalized” gas injection rates have slowed an average of 0.7 Bcf/d from August to September and another 2.2 Bcf/d from September to October. However, injection rates have picked up by 2 Bcf/d since June, adjusting for both seasonal and weather-related factors.
This year, the average injection rates were achieved when gas prices were about $3.30/MMBtu. “Higher prices have continually led to disappointing demand,” said Driscoll. Most of the additional variance, he said, can be attributed to “predictable seasonal changes in fuel choices by the electric power industry. Power generators typically try to run nuclear, coal and hydropower facilities at peak rates in the heat of the summer when air-conditioning demand is highest.”
This year, the pattern has implied that a $3.30/MMBtu gas price has led to average injection rates, and a $1/MMBtu change in prices leads to a 3 Bcf/d change in demand. Absent supply fears, war fears and supply overhang, Driscoll said that the elastic gas demand pattern will either raise or lower “this apparent equilibrium price in future years.”
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