Bounce Energy’s Update on the Natural Gas Prices for Q1

By Vernon Trollinger, January 16, 2013, Energy Efficiency, News, Save Money

source: NOAA/National Weather Service

Over the course of the past two years, natural gas prices have become more important to electricity consumers’ bill because more and more generator plants are switching over from coal to cleaner burning natural gas. Not just in Texas but also in the northeastern US where the rising demand for natural gas for generators is effecting the normal supply rhythm. Case in point: the Algonquin Gas Transmission (AGT) Company supplies natural gas to New England. In the past, natural gas was primarily used for residential heat during the winter and AGT’s supply pipelines typically faced running at full capacity during the winter months. However, this past summer (June-August, 2012) AGT’s pipelines flowed at 83% capacity —a wintertime load— up a full 62% from June-August, 2011 and 32% for the years 2005-2010.

So, has increased demand by the power generation sector shown an effect on drawing down last January’s record glut of natural gas? Is the price of natural gas finally going up?

Well…yes…and no…ish.

Let’s look at what’s working to drive the price of natural gas up:

First, there is the already mentioned increased demand by the electric generation sector beginning in 2009 when natural gas prices began dropping and EPA pollution regulations for coal-fire energy threatened to add further expense. In April 2012, EIA reported that monthly shares of coal- and natural gas-fired generation were equal for the first time with each fuel type producing 32% of the electrical supply. A number of other factors are playing in the tapering use of coal for energy: retirement of obsolete and inefficient coal-fire powerplants, rising coal-shipping costs, and increased overseas demand for coal. So, for the forseeable future, energy generation demand for natural gas is anticipated.

Second, there are fewer rigs in operation at this time than last year. According to the US Energy Information Administration (EIA), last year’s report for December 29, 2011 showed that operational natural rig count were being shut down, leaving 809 in operation. As of December 14, 2012, this number had been cut by nearly half to 416 rigs.

Now, let’s look at what’s keeping natural gas prices low:

First, like last year, the glut of natural gas in storage remains at near record levels. On November 2, 2012, inventories hit a record high level of 3,929 Bcf. Added to this are recently completed pipeline projects that increase the amount of natural gas available to areas of the northeast. By relieving congestion, the new pipelines have eased distribution and thus lowered regional natural gas prices.

Second, even though the rig count is lower and production has leveled off, the amount being produced continues to run high. EIA estimates a 9 percent increase in daily production occurred from August through September in 2012. This was the highest daily production rate, 69.4 bcf, since February 1973. EIA forecasts that total marketed production will average 69.6 Bcf per day this coming year, some of it coming from increased domestic crude oil production which is expected to increase to 7.1 bbl/day.

Third, demand has essentially been flat for two reasons. The tepid economic recovery has kept demand low because empty store and factory spaces don’t use much heat or electricity. Winter weather, however, is the most important of all. Last year’s warm winter built up current stored stocks due to low demand for heat in the northern states. While this year’s winter weather started off colder than last year, it’s not expected to last. EIA reports that average temperatures the week of December 19,”were 4.4 degrees warmer than the 30-year normal temperature and 4.7 degrees warmer than the same period last year.”

According to the National Oceanic and Atmospheric Administration (NOAA), the Pacific El Niño/La Niña weather pattern is in a neutral state. Their forecast for temperatures for January, February, and March (JFM) indicate that the second half of winter may tend to warmer temperatures:

“The seasonal temperature outlook for JFM 2013 indicates enhanced chances for above normal temperatures for much of the southern half of the continental U.S. except for coastal southern California, Florida, and along parts of the southeast coast. Below normal temperatures are favored for parts of the northern rocky mountains and parts of the northern great plains.”

This isn’t to ignore the possibility of a severe winter weather cold snap. AccuWeather.com is forecasting one for mid-to-late January that could last days.

So, where are prices going this first quarter?

Once again, the weather is the key. If NOAA’s prognostications are right, warmer than average winter weather will continue to drag down demand. Producers may respond by cutting back the number of operating rigs but they would also need to lower their production to draw down the stored volume off more quickly. So far this winter, temperatures in the lower 48 states have been averaging almost 5 degrees above the 30 year normal. Looked at in terms of heating days, the US average is 160. This year, there have been 32 fewer; or 128 days. Current estimates by EIA’s STEO expect an average price of $3.68 per MMBtu in 2013. Last Friday, January 4, NYMEX price for the February 2013 contract closed at $3.29/MMBtu with the spot price at Henry Hub just a penny lower. Natural gas prices also tend to drop this time of year and bottom-out in April. So, while a January cold snap will likely spike prices to reflect increased demand, afterwards they will likely decline as spring draws closer. Just how far they drop depends on how warm the remainder of winter is.

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