Tudor, Pickering, Holt & Co. (TPH) analysts on Wednesday joined the chorus of voices predicting natural gas storage levels to crater by the end of March, with their model pointing toward a winter exit at 1.1 Tcf. Average prices this year, they said, should average $4.50/Mcf.
"Massive storage draws we've seen this winter have not impacted regions within the U.S. equally," said TPH's team. "Northeast storage is largely regulated, less flexible than the U.S. Gulf Coast," with Northeast deliverability 50% of the U.S. Gulf Coast average and 30% of the Gulf Coast's salt dome deliverability.
"As a result, when it gets cold, Northeast storage deliveries increase, but Gulf storage deliveries skyrocket. Northeast storage has delivered 4.2 Bcf/d so far this winter, a 17% increase over 2006-2013 averages. Gulf storage has delivered 5.7 Bcf/d so far this winter, an 85% increase over the historical average."
The shoulder season should lead to a lot of gas-to-coal switching if prices remain around $4.50/Mcf, said the analysts. There's near-term optimism growing for onshore explorers as additional cold weather drives more storage draws, they added.
The TPH model points to an exit of 1.1 Tcf in storage with sustained higher prices. However, the 2015 forward curve remains relatively unchanged, flat year-to-date at $4.20/Mcf.
The unrelenting cold weather has highlighted TPH's call for an end to a Northeast premium because Gulf Coast storage and a lack of Northeast-to-Gulf pipelines supports Henry Hub and leaves the Northeast oversupplied, said the team. Spectra Energy management on Wednesday said it was working on projects to alleviate some of the problems (see related story).
When cold weather hits the Northeast, noted analysts, "storage is only a small part of the solution: when the Northeast burns 17-23 Bcf/d during cold days, 10 Bcf/d (50%) now comes from local production; 5-8 Bcf/d (35%) comes from pipelines, including (4-5 Bcf from the Gulf Coast and less than 2 Bcf from Canada). Around 15%, or 2-5 Bcf/d now comes from local storage."
Gulf Coast storage has been rapidly falling while it supports the Northeast market. "Gulf draws have been 85% above average winter to date; Northeast draws have been 17% above average."
Refilling storage may require another 0.4 Bcf/d from the Northeast during injection season, while the Gulf Coast may require 1.0-1.4 Bcf/d of additional gas.
Gas-to-coal switching to accommodate the additional injections of 1.4 Bcf/d also should increase, based on a price assumption of $4.50/Mcf. That sustained price would equal 2-3 Bcf/d of switching, by TPH estimates.
Northeastern production additions quickly would refill storage, while new pipes to the Gulf Coast are expected now to total around 0.5 Bcf/d. That Northeast softness, combined with Henry Hub tightness "could push differentials above $1.00/Mcf this summer."