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Gas Price Plummet Confirmed; Rebound Eyed For 2013

The flood of new natural gas supplies from U.S. shale exploration combined with stagnant demand due to the current U.S. economic woes lead natural gas prices to decline across the country by 38-49% from the first six months of 2011 to the first six months of 2012, according to research done by the Energy Information Administration (EIA). While prices are hovering near 10-year lows, at least one market analyst sees a light at the end of the depressed gas price tunnel in 2013.

The largest drop in average spot natural gas prices in key regional markets was found at Transco Zone 6 NY, which plummeted 49% to $2.87/MMBtu from 1H2011 to 2H2012, the EIA said last week. Chicago Citygates declined 45% over the same time to $2.43/MMBtu and the Henry Hub shed 44% of its value to $2.36/MMBtu, while Algonquin Citygates dropped 41% to $3.34/MMBtu.

Of the locations polled, the EIA found that PG&E Citygate in California had the smallest decline. But at 38% to $2.73/MMBtu, it was still considered significant.

"Rising production, record end-of-winter storage inventories and mild weather contributed to spot natural gas prices nearing their lowest levels in a decade until prices rebounded at most trading points to the high $2/MMBtu range by the end of June," the EIA said.

The government agency said U.S. dry natural gas production was about 5% higher during the first half of 2012 compared to the same period in 2011, according to Bentek Energy.

"This growth has been largely driven by gains in the Marcellus shale, where production nearly doubled from June 2011 to June 2012 and now comprises about 9% of total U.S. dry gas production," the EIA said. "Increases in the Marcellus basin helped offset: slower growth or even modest declines in other gas supply areas, lower deliveries of liquefied natural gas (LNG), reduced net imports (imports minus exports) via pipelines from Canada, and increased natural gas exports to Mexico."

The production growth was not followed by a significant uptick in gas demand. Overall, natural gas consumption was up by just over 1% through the first half of the year, the EIA found. This disparity between supply and demand growth rates lead to U.S. record natural gas storage inventories at the close of the winter 2011/2012.

"As a result, storage operators or their customers have not needed to buy as much natural gas to inject in preparation for the upcoming winter or to manage day-to-day imbalances, and this has contributed to lower natural gas prices," the EIA said. "Last month, total U.S. natural gas storage inventories in the Lower 48 states topped 3 Tcf for the first time ever during June."

On Thursday morning the EIA reported that 24 Bcf was injected into underground storage for the week ending Aug. 3. While the build was deemed bullish for natural gas prices by analysts and traders, the 3,241 Bcf currently in storage still represents a 13.5% premium over the 2,855 Bcf five-year average for this week of the year.

Even as the EIA in its August 2012 EIA Short-Term Energy Outlook walked back it's July prediction that there would be 4,000 Bcf in storage by the season's end at the conclusion of October, it's new forecast of 3,954 Bcf would still set a new record (see related story).

However, that supply surplus is not likely to stick around for long according to Stephen Smith of Stephen Smith Energy Associates, who noted last week that stagnant gas production levels, which could fall into a decline before the year's out, and an increase in gas demand for power generation and as a feedstock could spark a price rebound in 2013 as the supply-demand balance returns to equilibrium.

Smith estimated that these factors are going to take the Henry Hub natural gas bidweek average price from $2.68-2.70/MMBtu for full-year 2012 to $3.70/MMBtu full-year 2013.

In his Monthly Energy Outlook released at the end of July, Smith noted that the supply glut has already seen a significant trim this summer. "At the start of April, the gas storage surplus (vs. 2006-2010 norms) peaked out at 900 Bcf," he said. "By early August, this surplus is likely to be close to 360 Bcf, thanks in part to what has been another very hot summer thus far."

He added that two other main factors have combined to reduce the storage surplus. "First, U.S. Lower 48 onshore gross gas production has been essentially flat from November through May, in sharp contrast to an average sequential monthly increase of 0.5 Bcf/d per month for the previous 24 months," Smith said. "Second, with Henry Hub gas prices below $2.50-$3.00/MMBtu, power generation shifts from coal to gas have been much larger than the ongoing trend coal-to-gas shifts of recent years."

By year-end the price analyst said the flat production trend of recent months "is likely to evolve into a trend production decline -- one that could require several months to reverse." When looking at the complete picture, "these factors suggest a better supply-demand balance for U.S. gas in 2013," Smith said.

Data within the Energy Information Administration's (EIA) May 914 gross gas production report seems to confirm the supply-demand trend that Smith points to. In the report the government agency confirmed that Lower 48 gas production was flat while demand is ticking higher (see NGI, Aug. 6). Total gas consumption for May 2012 was 1,850 Bcf, which set a new May record, EIA said. This was an increase of 11% over the previous May record set in 2011. "Deliveries of natural gas to the electric power sector of 819 Bcf drove the trend, reflecting continued displacement of coal with natural gas," the EIA said. Total U.S. production in May was 81.51 Bcf/d, a decrease of 0.1% from a revised 81.56 Bcf/d in April.

In dissecting the EIA's May report, Smith said the flat production trend line that was established last November still appears to be intact.

While pointing out that there has been a 53% decline in the natural gas rig count from November 2011 through May 2012, Smith said "this steady production rate is being achieved by the time-delayed completion of the large inventory of drilled but uncompleted wells that accumulated during the horizontal drilling boom of the last few years. Gas production for the last half year has also been supported by the coproduction of gas from the increasing rate of oil completions. We expect the current flat production trend to gradually transition to a trend decline, most likely beginning in the second half of the year."

Thanks to this trend, Smith said he expects higher gas prices in 2013 as production remains flat for much of the year. "Our assumptions lead to about a 1.5 Bcf/d increase in consumption in 2013, but we are likely to begin 2013 with a still sizeable storage surplus," he said. "All factors combined, and absent major degree-day surprises, odds appear to favor a considerably more balanced market with higher gas prices in 2013."

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