Natural gas price bears could be in for a treat over the next few months if Mother Nature goes along with WSI Corp.’s just-released forecast, which calls for the May-July period to be cooler than normal across parts of the northeastern United States, with above-normal temperatures common elsewhere, especially in the western United States.
“The summers of 2010-2012 were the hottest three consecutive summers in the U.S. since at least 1895,” said WSI Chief Meteorologist Todd Crawford. “The heat was due, in part, to a combination of (1) warmer-than-normal North Atlantic temperatures, (2) a lack of El Nino conditions and (3) expanding drought conditions. Heading into the upcoming summer, an examination of these factors reveals a lesser degree of consensus regarding heat relative to the past three years.”
He said that while a significant El Nino event is not expected, recent and expected warming in the tropical Pacific may occasionally support a pattern that favors cooler-than-normal temperatures in parts of the eastern U.S. Further, he expects the most significant spring rains to impact areas from the Plains eastward, while the western U.S. will continue to dry out.
“This evolution is more suggestive of a west-based drought this summer which would favor very warm summer temperatures there, and potentially cooler-than-normal temperatures downstream in parts of the eastern U.S.,” Crawford said. “Finally, there have been persistent trends in recent climate model forecasts towards a cooler summer across parts of the eastern U.S. Our final analysis suggests that this summer will not be as hot as the previous three, but will still be characterized by widespread areas of above-normal temperatures, especially across the southern and western U.S. The best chance for below-normal temperatures this summer will be across the Great Lakes region.”
A cooler Northeast to kick off the summer could put a kink in the recent bullish run on natural gas prices, which has seen NGI‘s Henry Hub index rise from sub-$3/MMBtu last summer to the current price level in the $4.30s/MMBtu as the winter’s storage drawdown went further than most analysts expected. WSI’s bearish-for-natural-gas weather forecast also runs counter to industry expectations.
Over the last few weeks the Energy Information Administration (EIA) and a parade of analysts at Goldman Sachs, Raymond James & Associates Inc., Tudor, Pickering, Holt & Co. Inc., Morgan Stanley, Barclays Capital and Stephen Smith Energy Associates individually predicted higher natural gas prices this year (see Daily GPI, April 17; April 10; April 9; April 8; April 5; April 4). The reasons cited by those analysts include the cold end to the 2012-2013 winter and EIA Form 914 data indicating declining production. Analyst price predictions for 2013 have run as high as $4.11/MMBtu in a bull-case forecast.
In breaking down the months, WSI sees May as bringing warmer-than-normal temperatures to the entire country with the exception of the Northeast, which is expected to be cooler than normal.
“Although much of the U.S. will see warmer-than-normal temperatures, the load-heavy northeastern markets will see cooler-than-normal temperatures,” said Paul Flemming, director of power and gas at Energy Security Analysis Inc. (ESAI). “As generator maintenance winds down in the Northeast, greater generator availability and lower loads will be bearish for May market heat rates. Increasing electrical load due to growing cooling demand by the end of the May should help to firm implied market heat rates in the West and Southwest.”
In June, WSI once again expects the vast majority of the country to exhibit warmer-than-normal temperatures, except this time the north central portion of the United States will enjoy cooler-than-normal temperatures.
Flemming said that with western U.S. temperatures projected to be much warmer than normal, ESAI expects that western natural gas demand will be stronger to support cooling demand from the power sector. “In the North Central region, cooler temperatures are not likely to provide any meaningful offset to higher gas demand in the West. In PJM, the cooler-Midwest/warmer-East temperature gradient splits the pool and should tend to increase west to east flows and congestion, particularly on warmer days. Overall, we continue to expect that June should be a stronger-than-average month for gas demand as the power sector ramps up to meet cooling demand,” he said.
WSI said it expects July to look much like May in that warmer-than-normal temperatures will be found throughout the United States with the exception of the Northeast, which will once again be seeing cooler-than-normal conditions.
“The outlook for cooler temperatures in the Northeast in July breaks the trend toward warmer summer temperatures over the past few years,” said Flemming. “With a much lower likelihood of summer heat events, Northeast market heat rates will come in lower than expected. Likewise, natural gas demand will be correspondingly lower due to lower power sector demand for cooling. The Southwest markets are forecast to have much warmer-than-normal temperatures and are more likely to see heat events and volatile energy prices during July.”
WSI, based in Andover, MA, said it will issue its next seasonal outlook on May 21.
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