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FERC Staff: $3.50-4.50 ‘Sweet Spot’ for NatGas Prices
Barring extreme weather this summer, natural gas prices aren’t likely to vary too much from their current trading range, said FERC staffer Eric Primosch of the Commission’s Office of Enforcement (OE).
“We think that this $3.50-4.50/MMBtu range is the sweet spot for natural gas prices,” Primosch said during a presentation of the Summer 2013 Energy Market and Reliability Assessment and the 2012 State of the Markets Report during a Federal Energy Regulatory Commission (FERC) meeting Thursday. “The prices are high enough to incentivise some production growth, but not too high to price gas generators and industrials out of the market.
“We think that prices should stay in this range unless we see some extremely abnormal weather conditions, but I think this is a pretty solid range for gas prices right now.”
Gas prices, which had been deflated by a flood of production from the nation’s shale plays and some uncooperative weather patterns, have made a bit of a comeback over the past year.
“Last winter [2011-2012] was one of the warmest on record; we pushed storage inventories to record levels, and then gas prices tanked,” Primosch said. “However, this past winter [2012-2013] was closer to normal, which caused a 22% increase in residential and commercial gas demand over last year, which in turn reduced storage inventories pretty significantly. Heading into this recent injection season, storage levels were 30% below last year and 5% below the five-year average. So, lower inventories, plus we saw some late cold weather going almost into the spring, and we saw gas prices rise from $3 to the $4 range.”
Market conditions going into the summer will reflect the rebound in natural gas prices and the anticipation of warmer-than-normal temperatures for most of the country, according to the reports. Electricity reserve margins remain adequate, though Texas faces increased risk if it experiences extreme heat, and South Orange County, CA, and San Diego face “very tight” capacity situations while the San Onofre Nuclear Generating Station remains offline (see NGI, May 6).
Higher natural gas prices should favor dispatch of coal over gas, and an increase of forward natural gas prices above $4.00/MMBtu will drive an increase in electric forwards, according to the reports.
“Natural gas forward prices for July and August 2013 show a dramatic increase compared to 2012, when forwards were below $2.50/MMBtu, however, they are similar to 2011 forward prices,” said FERC staff.
A year ago, FERC said a gas surplus and sub-$2-2.50/MMBtu prices would put downward pressure on power prices through summer 2012, and step up the switching of generation facilities from coal-fired to gas-fired (see NGI, May 21, 2012). Natural gas production grew to a new all-time record in 2012, which contributed to the lowest nominal natural gas prices in a decade.
“Contributing to the price decrease was a 5% growth in U.S. natural gas production, a 10% drop in residential and commercial natural gas demand due to one of the warmest winters on record in the first quarter of 2012, and high storage levels,” according to the State of the Markets report. “By the spring of 2012, working gas in storage stood at a record 934 Bcf surplus to the five-year average and robust injections in the spring and fall brought storage to near record levels by November 2012.
“The growth in production was driven by gains in drilling rig efficiency and was centered mostly in Pennsylvania’s Marcellus Shale, the Eagle Ford Shale in Texas, and the Fayetteville Shale in Arkansas. In other major shale plays, production stalled or declined as producers concentrated on liquids rich natural gas fields.”
Not coincidentally, liquefied natural gas (LNG) exports declined in 2012, while a growing number of companies contemplated LNG exports, and pipeline exports of natural gas to Mexico increased 24% (see NGI, March 18).
“If we add the exports to Mexico, which in 2012 totaled 1.7 Bcf/d, to Canadian exports, we come up with a total of 4.4 Bcf/d,” OE’s Omar Cabrales said. “To date, there have been approximately 27.7 Bcf/d of export capacity proposed by the different companies, so that would be about 15% of capacity. When we break it down, the exports to Mexico have been going up quite a bit over the past two or three years, and we foresee that that’s going to continue for at least the next two or three years.”
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