The quick transition this year to the cooling season from the heating season is likely to provide only temporary support for higher natural gas prices because of the “relatively robust” inventory builds toward the end of the heating season, noted Credit Suisse energy analysts in a report issued late Monday.
This year’s gas prices, they said, still should average $4.75/Mcf, which is the same price forecast Credit Suisse issued in April.
“Sure, record heat and hurricane disruptions could prevent the industry from rebuilding storage to adequate levels this season,” said Credit Suisse analyst Teri Viswanath. “However, given current high inventory levels, the industry is on track to build 3.8 Tcf by the end of the season by simply injecting at the 10-year average rate.”
Where gas prices trend this summer is determined mostly by the market’s expectation of whether the industry rebuilds an adequate level of inventories ahead of the winter heating season, the analyst noted. The “chief impediments” in a low-demand summer include heavier-than-expected demand from gas-fired generation and supply disruptions caused by hurricane activity in the Gulf of Mexico.
“This year the industry will likely encounter both sweltering temperatures and a half-dozen major hurricanes on the way to rebuilding storage,” said Viswanath. “Market participants have certainly paid attention to these ominous seasonal forecasts and as a result have extracted a premium for the summer strip.”
From April through last week’s Energy Information Administration (EIA) storage data release, “we note that cumulative cooling degree days [CDD] for the total U.S. have surpassed last year’s levels by 23% or 59 CDDs. Not surprisingly, the 101 Bcf year/year (y/y) storage surplus amassed through April has now converted into a -14 Bcf y/y deficit as of the last EIA release.”
The “obvious cure to high natural gas prices (in a well supplied market) is high gas prices. Natural gas prices have now risen to a point where coal generation is recapturing market share (a trend we expect to intensify during the upcoming shoulder months). Reduced coal-to-gas electric power switching will likely keep balances relatively loose during the shoulder period.”
The three “key factors” that limited gas storage injections last year were coal-to-gas switching, producer shut-ins and early heating demand, Viswanath noted. Those factors “will not be present this year. The possibility of a strong finish to the injection season will likely dampen the opportunities for an extended rally.”
The U.S. gas-directed rig count may turn lower, but “the resurgent trend in drilling from last year’s low contributes to our outlook for production growth in 2010,” said the Credit Suisse analyst. “Given the strong first quarter trend, we now expect that domestic production could increase by as much as 1 Bcf/d in 2010.”
According to the Weekly Rig Roundup published on Monday by Tudor, Pickering, Holt & Co. Inc. (TPH), all three U.S. land sources posted rig gains last week from the previous week. RigData showed a gain of 43 rigs, Smith Bits’ count was up by 19 rigs, and Baker Hughes Inc. (BHI) said there were 13 more rigs in operation week/week (w/w).
BHI’s gas rig count — minus Gulf of Mexico (GOM) rigs — was up by four rigs w/w, while the onshore oil rig count grew by 10 rigs. RigData’s analysis w/w showed that 11 more gas rigs were put into operation; “gas/oil” rigs jumped by 30; “oil” rigs were down by four; and “other/unclassified” was up by six rigs.
According to the TPH report, Southwestern Energy Co., one of the biggest onshore U.S. gas producers, added more rigs than any other producer w/w, up by five rigs to 29 total. By region, the Midcontinent, Rockies and South Texas gained 12-14 rigs each, said the report. The gains partially were offset by declines in East Texas/North Louisiana (the Haynesville/Bossier shales), which lost six rigs, and in West Texas/New Mexico, which lost four rigs w/w.
The “books now are closed” on U.S. rig data for the second quarter, noted TPH. In the three-month period RigData reported a 14% jump in onshore rigs from the first quarter, while Smith Bits was up 11% and Baker Hughes also was 14% higher.
Meanwhile, the GOM region had a seven-rig decline w/w, and it now has 40 total rigs in operation, the report noted. According to TPH, Hercules Offshore Inc. was the biggest loser last week, losing four rigs w/w.
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