The U.S. natural gas market is staring down a "summer of extremes" because of record storage inventory, which means production curtailments are coming, but they won't prevent a repeat of sub-$2.00 spot pricing later this year, according to Bentek Energy LLC.
In "Gas Tank Full: Henry Hub Will Re-Test Price Floor," issued on Thursday, Bentek's analysts said the April-ending 0.9 Tcf storage surplus would force the domestic gas market to test operational storage constraints by the end of injection season, leading to extremes in injection rates, power demand and production curtailments.
To reduce storage inventories, up to 0.9 Bcf/d of production would need to be shut in from basins outside of the Northeast. "The market will elicit the needed behavior through low pricing, averaging in the $2.00-2.75 range during the peak of the cooling season, with a $1.00 handle monthly average at the end of summer," the Bentek team wrote.
Steady output growth from the Marcellus, Haynesville, Eagle Ford and Granite Wash, which accelerated in 2010, "easily" offset declines in conventional and offshore producing areas.
Meanwhile, gas storage has been "carving out a new five-year high every week," and domestic stores "will very likely" hit a record inventory by the end of the injection season.
According to Bentek, storage operators have reported constraints in the past, which indicate that a "more realistic" gas storage capacity may be somewhere between the Energy Information Administration's (EIA) most recent 4,103 Bcf noncoincidental peak working gas capacity and the 4,488 Bcf total design capacity.
EIA's figure is equal to the sum of each field's maximum observed inventory; Bentek assumes a "generally high level of operational flexibility" from operators and has settled at 4,200 Bcf, taking into account this summer's storage expansion projects.
"Such an event will be accompanied by mandatory limits to storage activity," said the report, which noted that the maximum observed U.S. inventory was 3.9 Tcf in November 2011. The limits mean that only 65 Bcf can be injected weekly, or about 1.3 Bcf less than the 2005-2011 average weekly rate and 4.6 Bcf less than the 2008-2011 weekly rate.
Without anywhere to put the gas, demand could take the pressure off, but it will take a "strong weather-adjusted power burn" to avoid production curtailments later this summer, according to Bentek. "Even in a scenario where production remains flat for the entire injection season, total demand will have to average 6.3 Bcf/d stronger than the five-year summer average and 4.3 Bcf/d stronger than summer 2011 average demand to hit a 4.2 Tcf inventory by the end of the season."
An unusually hot summer -- even back-to-back hurricanes -- would have little impact on the U.S. gas market at this point, according to another report by Standard & Poor's Rating Services (S&P), also issued on Thursday. Many U.S. exploration and production (E&P) companies have the financial resources and flexibility to wait out low gas prices, but operators whose reserves are dry gas-concentrated, lack price hedges and have limited liquidity may be in for a bumpy ride, according to S&P's Ben Tsocanos. He and his team analyzed what's ahead for domestic E&Ps in "How U.S. Exploration & Production Companies are Coping with Low Gas Prices."
Gas prices won't rebound quickly, and supplies likely will remain plentiful over the next 12 months "in part because oil wells liberate it," said Tsocanos. "This means that a relatively small proportion of liquids can make even a gas well profitable -- while the well swells gas supplies."
Mirroring Bentek's report, Tsocanos said "gas prices could drop further if storage hits capacity (possibly by fall) while supplies continue to rise; there's now nearly 40% more gas in storage than the five-year average for this time of year."
Natural gas liquids (NGL) can't "prop up profits of even liquid-rich gas wells indefinitely," said Tsocanos. S&P already has begun to see prices drop for some types of NGLs, including ethane, as supplies grow. Low gas prices may stimulate gas consumption in several industries, encourage exports and even fuel transportation fleets, but none of this will happen overnight. Even Mother Nature wouldn't diminish gas supplies much at this point, said Tsocanos.
"An unusually hot summer would likely have only a short-term impact," said the S&P analyst. Even back-to-back Gulf of Mexico hurricanes like Katrina and Rita, which upended the gas market in 2005, would be offset by inland unconventional plays.
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