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Experts Expect Storage Surplus to Vanish by November

Working gas levels ended the withdrawal season during the week ended March 25 at 1,239 Bcf, or about 19% higher than the average seasonal low point over the past 11 years, according to Energy Information Administration data. That will mean more gas to meet summer power demand, but it probably won't be enough to put much downward pressure on prices, according to two industry experts.

"It looks like we are going to have a substantial increase in gas consumption for power generation over last year," said consultant Ron Denhardt of Winchester, MA-based Strategic Energy & Economic Research Inc. "We are expecting 2.7% growth in electricity demand from April through October" and most of that will draw solely on natural gas-fired generation units during the peak demand months of the summer.

Last summer was mild and the key months of July and August were much milder than normal. "That really makes a huge difference in terms of how much gas-fired generation was used because those are the hottest two months, and that's when all the peakers come on with low heat rates and gas is on the margin," he said. "It really lowered gas demand a lot last year."

Gas demand for power generation last July and August was 9% below normal because of mild temperatures. This year the story is likely to be much different given normal weather. "One of the big questions is whether most of the increase in power demand is going to be demand for gas-fired generation [or coal-fired]. We're kind of assuming that it will be [gas]," said Denhardt. "And that gets us a 10-11% increase in demand for gas generation during the nonheating season."

Kevin Petak of Arlington, VA-based Energy and Environmental Analysis Inc. (EEA) also is predicting a big increase in gas demand for power generation during the peak demand months of the summer. "The supply-demand balance will be tighter this summer and we think the power generation gas use will be higher. That's where the big change is on the demand side of the equation. We think that power sector gas consumption in June through August could actually be about 10% higher than it was last year due to weather and due to higher oil prices because higher oil prices tend to discourage gas-to-oil switching.

"Basically there will be more gas going toward power and less gas available for storage refill. That's a lot of why our price projections this month are so much higher than last month."

EEA made a substantial revision this month to its natural gas price projections for the year because of much higher oil prices and the large storage withdrawals in March when the weather nationwide was colder than normal. In its March forecast, EEA expected Henry Hub prices to average $5.67 this year but in its April forecast, Henry Hub prices are expected to average $6.84 in 2005. EEA expects summer prices will average $7.

With so much more demand this summer, the current gas storage surplus will dry up by the end of the injection season, both consultants said. They both predicted that storage levels will end the injection season about 100 Bcf lower than where they were at the end of last October (3,300 Bcf).

"With normal weather we should have about 3,200 Bcf in storage on Nov. 1, even though we are 200 Bcf above average now," Denhardt said. "Power demand is a big factor along with very little gas production growth."

While some market observers may think projections of 3.2 Tcf of gas in storage are bearish, that simply isn't the way the market works these days, Denhardt said. "I think if storage isn't close to full, prices will stay high. We did 3.3 Tcf last year so we clearly can do more than that. I think if we get to 3.3 Tcf, the market will moderate a little bit, but 3.2 Tcf is not going to make people happy going into the winter.

"We're predicting prices a little below the 12-month strip but not by much. We have prices averaging $7.34/MMBtu at the Henry Hub from April through October. That's with normal weather. If it gets hot, it's going to be a lot worse than that. A 1% difference in demand is about 100 Bcf over the nonheating season."

Most summer forecasts are calling for warmer than normal temperatures. But last year meteorologists said the summer was going to be hot and the winter was going to be colder than normal and they were wrong both times.

A major factor influencing gas prices this summer obviously will be the crude oil market. With crude prices at more than $55/bbl and a historical 6:1 price ratio to natural gas based on Btu content, some analysts say gas still has plenty of room to rise. The 12-month strip Tuesday was $8.075.

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