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Natural Gas Demand Analytics Part 3:

It’s Déjà vu All Over Again; The Case for Record Power Burn in the Summer of 2016

March 16, 2016 | By Robert Applegate, PhD

Happy 1st Birthday to Get the Point
PointLogic Energy’s Get the Point analytics report is one year old this week, and to celebrate that milestone, this article will travel back in time.

It was the summer of 2012: Mitt Romney was trying to rally the GOP as the establishment candidate for president, while Donald Trump was in the news questioning the citizenship of another presidential candidate. South Korean pop star Psy released “Gangnam Style” and Carly Rae Jepsen released her viral hit “Call Me Maybe.” Movies “The Avengers” and “Batman” were in theaters, and natural gas power burn hit never-before-seen highs.

Fast forward to today: Mitt Romney is trying to rally the GOP around the establishment candidate(s), while Donald Trump is questioning the citizenship of another person running for president. “The Avengers” and “Batman” are hitting the big screen again, and here at PointLogic Energy, we expect natural gas power burn to best all previous records.

In this edition of Get the Point, we will discuss the conditions that led to the record power burn in 2012 and explain how 2016 is mirroring those conditions.

The unseasonably mild winter…

First and foremost, the biggest driver of natural gas demand is always the weather. In a hot summer, warm weather pushes natural gas power demand higher as consumers run air conditioners, backed by power-generating facilities; and in cold winters, heating demand for industrial, residential and commercial space peaks. Conversely, a cooler summer or mild winter erodes these comfort-seeking usage levels, thereby driving down natural gas demand.

The peak months of winter 2011/2012 (December-February) were unusually mild, with a population-weighted temperature for the U.S. as a whole coming in at just above 44°F. This past winter, December 2015 to February 2016, U.S. population-weighted temperature, driven by El Niño, topped out just above 45°F, as seen in Figure 1. This was significantly higher than typical winters, which come in around 40°F.

Utilities plan for cold winters so that they are not caught short and have to buy gas on the spot market during peak demand. When an unexpectedly mild winter occurs, utilities and other entities that hold storage do not need to withdraw as much gas out of inventory for winter heating demand.

U.S. Average Population Weighted Temperature

Resulted in high storage inventories in the spring…

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The most recent mild winter has led to record storage inventories for this time of year, which have been the topic of many PointLogic Energy daily articles and editions of Get the Point, such as The Winter that Never Was and the Summer that Could Be. Therefore, we will not go into great detail about how high the storage inventories are currently, but rather discuss the current level as it relates to 2012. For the years 2011, 2013, 2014 and 2015, storage inventories for the beginning of March averaged 1,530 Bcf. Meanwhile, the year when we last had a very mild winter, 2012, left us with inventories on March 9 of 2,369 Bcf.

Looking currently, EIA puts natural gas storage inventories at 2,479 Bcf as of March 4, 2016. The similarity to 2012 can clearly be seen in Figure 2; in both years, levels for early March are more than 400 Bcf higher than the next nearest year.

As any gas trader would know, EIA’s weekly storage inventory number released on Thursday morning moves prices. Depending on what number the market is expecting, the price moves up or down when EIA publishes its official number. The storage inventory is inversely related to the price and thus, with higher than expected storage levels in the spring of 2012, a low price environment ensued, as it does now in the spring of 2016.

Natural Gas Inventories

Created a very low price environment…

With storage inventories high for spring 2012 and spring 2016, prices fell, as can be seen in Figure 3.

Typically throughout the year, prices will ebb and flow with demand, assuming relatively steady production. As far as price goes, 2009/2010 and 2013/2014 were typical years, with typical springs. Cold in the winter created heating demand and bumped up prices, which then came back down in the spring as that demand diminished. During the end of 2011 and into 2012, the price of natural gas continued to fall, as can be seen in Figure 3. A similar trend can be seen for the end of 2015 and into 2016. The mild winters and resulting high storage inventories created a different dynamic and resulted in low prices coming into both the summer of 2012 and the summer of 2016.

Henry Hub Nat Gas Spot Price

Adding a very hot summer…

Something to note is that, not only was the winter leading into 2012 warmer than normal, but the summer of 2012 was extremely hot. Looking back to NOAA’s outlook for peak summer of 2012 (June-August), seen in Figure 4, we can see that temperatures throughout the U.S. were higher than average. This increase in temperatures can especially be seen in the southern U.S., where natural gas was -- and still is -- a substantial source of power generation. The high temperatures of 2012 kept a lot of people running their air conditioners and led to record levels of natural gas power demand.

Fast forward now to 2016, for which NOAA is again predicting a hot summer, as seen in Figure 4. We are again set up for significant air conditioning load throughout the U.S., and thus an increased need for power generation.

NOAA: Summer

Creating the environment for record power burn

As stated previously in this article, weather drives demand for natural gas. A warm start to 2012 pushed down demand, resulting in higher than normal storage inventories, which then pushed prices down right before a hotter than normal summer, which resulted in record power burn. As a result, 2012 held the record for natural gas burn power generation at 24.7 Bcf/d for a few years until 2015 beat that record, thanks to normal temperatures and years of utilities switching from coal to gas (Figure 5).

The prominence of gas-powered electrical generation is an important difference as we look at 2012 compared to 2016. The power market is fundamentally different today than it was in 2012.

U.S. Total Power Burn

When normalized for temperature, the first three months of 2016, 2012 and 2015 all stand out, as seen in Figure 6. The U.S. Power Burn per Degree chart shows how gas is burned for power, irrespective of temperature. As the yearly trend lines shift up in the burn per degree graph, natural gas takes more of the baseload generation. Leading into and during summer of 2012, natural gas was inexpensive and natural gas power generation was needed to satisfy high demand, creating a fundamental shift in the power generation market. But in 2015, the high levels of gas production and coal-to-gas retirements helped create a scenario when natural gas took even more of the power generation load.

U.S. Power Burn per Degree

Now, in 2016 most analysts, including PointLogic Energy, believe that the rate of coal-to-gas switching has peaked. PointLogic Energy is currently estimating less than 500 MMcf/d of gas-equivalent coal power retirements this year.

That being said, we still believe 2016 natural gas power generation will outpace 2015 by more than 1 Bcf/d. The mild winter due to El Niño has resulted in higher than normal gas storage inventories, which has kept prices low. The summer is expected to be hotter than average, which will lead to record power burn for natural gas. And there will be incremental gas gains due to continuation of the switching away from coal generation.

As discussed in the last edition of Get the Point, renewables could come in hard this summer and tamp down natural gas demand for power generation, but ultimately the market has shifted and the summer 2012 scenario is back and poised to push demand even higher. In the natural gas power market, it’s 2012 all over, so the market can prepare to channel its inner Psy dance moves and all start dancing to “Gangnam Style” again.

 

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