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Natural Gas’s 2015 Summer Balancing Act

March 25, 2015 | By Jack Weixel

PointLogic Energy supply and demand historical data show that the lower 48 is now 5.1 Bcf/d long this winter heating season compared to last winter. This is a stark change from just one month ago when the balance ran 8.3 Bcf/d long. As the market has witnessed the past four weeks, Res/Com demand finally showed up, moving its season-on-season position from 4.9 Bcf/d short to just 2.7 Bcf/d short. Dry production has also sagged slightly, down 0.5 Bcf/d to 4.4 Bcf/d long in the current to-date comparison. While there are concerns this summer regarding whether production can keep up its recent pace, this issue of Get the Point will address the other elephant in the room that is the impact of low natural gas prices on summer demand and injections into storage.

Supply & Demand Seasonal Comparison

Source: PointLogic Energy Supply & Demand Seasonal Comparison, Winter 14/15 vs. Winter 13/14, March 20, 2015

Source: PointLogic Energy Supply & Demand Seasonal Comparison, Winter 14/15 vs. Winter 13/14, February 20, 2015

Despite the dwindling nature of natural gas’s seasonal net long position, both Henry Hub spot prices and the prompt month have declined over the past month with cash down from $2.92 on February 20 to $2.82 at the beginning of this week.

Source: Energy Information Administration (EIA)

The last time that the Henry spot price slipped below $3 coming out of withdrawal season was in the spring of 2012, when the warmest winter on record in the past 60 years sent both futures and cash prices tumbling to a bottom of $1.88 on April 4, 2012.  By comparison, this winter is shaping up to be only the 19th warmest winter on record, but prices are still below $3. 

The summer of 2012 can still be considered a channel marker, if not an exact parallel to what can be expected in summer 2015.  While overall storage inventory levels were much higher in the spring of 2012, daily production and overall supply available to replenish storage was much.  This year, the market can expect to see 72 Bcf/d of dry natural gas production, which will naturally drive injection levels higher, but the more important factor may just be the reaction by power generators to low-priced natural gas available to feed their power plants.    

Due to the extremely low price of natural gas, the summer of 2012 saw a notable increase in power demand from natural gas fired generators.  In fact, power demand averaged 27.9 Bcf/d in the summer of 2012, peaking in the months of July and August at 34.9 Bcf/d and 32.4 Bcf/d respectively.  These levels of power burn have not since been duplicated, but could the current low price environment drive utilities to make the same dispatch decisions made two years ago?  A sub $3/ MMBtu gas prices provides enough economic incentive to switch from coal as a base load generation source.  This summer also has the added factor of utilities preparing for implementation of the EPA Mercury and Air Toxic Standards (MATS) emissions rules.  PointLogic anticipates that up to 30 gigawatts (GW) of coal-fired generation may be retired over the course of 2015. This is only the beginning of a steady, systemic increase in overall demand which will include late 2016 increases in Mexican and LNG exports.   But in the meantime, how will increased power burn impact inventories this summer?

PointLogic has examined injection levels from previous summers to devise some bumper guards from which to gauge this summer’s anticipated injection level.

Source: EIA and PointLogic Energy research

Summer of 2014 saw 2.8 Tcf of gas injected, the highest amount ever including 11 weeks of 100+ Bcf injections.  Only two years earlier, one of the historically weakest injection summers occurred in 2012, as low gas prices initiated the switch to more consumption by power generators and only 1.6 Tcf of gas was injected.  These two seasons can be used as upper and lower bounds on the graph above.  In addition, plotting 5 year average injections results in net injections of 2.1 Tcf over the summer and 3.6 Tcf in the ground at the end of October.  So, what’s a reasonable expectation for the pace of injections this summer based on the natural gas supply and demand balance? 

Provided that: a) power generators behave in a similar pattern as the summer of 2012, average demand will increase by 4 Bcf/d versus last summer’s power burn average of 23.9 Bcf/d and b) production remains stable at 72 Bcf/d, or roughly 1.5 Bcf/d higher than average levels seen last summer, it is not a far leap to think that the net supply demand balance this summer could run as much as 2.5 Bcf/d short versus the summer of 2014. 

Under this scenario, injections would total 2.2 Tcf over the summer and 100+ Bcf weekly injections would occur only a handful of times.  Assuming a 1.5 Tcf start to summer injection season, end of summer 2015 inventories would come in just above 3.7 Tcf, just shy of the 5 year average inventory level at the end of October. 

Should power burn not show up this summer, the market could find itself facing an unprecedented storage glut, with end of season injection levels near 4.0 Tcf, barring a total collapse in lower 48 dry production.  Eventually, markets do balance, swinging from net long to net short positions in relatively quick fashion – if the market does not go short this summer, a steady increase in systemic demand (driven by lower prices and sustained high inventory levels) will ensure that any storage surplus is taken care of in 2016 and over the longer term.

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