US Natural Gas: Nowhere But Up?
By Simona Gambarini
AT THE END of last winter natural gas inventory storage was about 60% above prior-year levels, as milder than expected winter weather prompted a contraction in demand. Although the excess supply narrowed considerably during the summer, natural gas stocks still remain 5.6% above their five-year average (US Energy Information Administration data). The combination of production cut-backs and cold weather in the mid- continent and Eastern US, and possibly returning demand in the Northeast, has helped provide a boost to natural gas prices. However, for gas prices to hold, expectations of a cold winter will have to be met.
Inventory Overhang: Less of an Issue Natural gas prices tend to be inversely correlated to
storage surpluses and can react quite strongly to weekly build ups or drawdowns in inventory estimates. Although this is particularly evident in the price dynamics of last
... for gas prices to hold, expectations of a cold winter will have to be met
winter, more recently expectations of a smaller than average increase in gas inventories, coupled with the arrival of colder temperatures in the US is keeping natural gas prices supported at around US$3.7/MMbtu, the highest level in a year. Gas prices usually rise early in the winter on expectations of accelerating demand amid colder temperatures. However, given the already higher
Working Gas in Underground Storage Compared to 5-yr Range
Billion Cubic Feet, Weekly from Nov 9, 2010 to Nov 9, 2012 Working Gas in Storage
Henry Hub Price - 1 Week lag (RHS, US$/MMBtu) Storage Surplus - 5 Year Av. (LHS, Bcf)
than average inventory level, there is a substantial risk that natural gas prices might fall sharply if cold winter weather expectations are not met.
Utility Demand & The Substitution Effect The majority of US electricity generation is from fossil
fuels, with petroleum, coal and natural gas representing the core sources. As most utility companies are able to source their power depending on the relative price of oil, gas and coal, the downward correction in natural gas prices early in the year has affected relative demand. The relatively low price of natural gas vs oil and coal has caused some switching to natural gas by end-users over the past months, where substitution has been feasible. In the aftermath of Hurricane Sandy, nuclear plant outages remain well above last year and the five-year average. This has provided further support to gas prices as cold temperatures forced consumers to resort to natural gas to heat up homes and businesses as gas-fuelled power plants are typically used to replace any lost nuclear power generation.
Lowest Rig Count Since 1999 Supporting Prices Another effect of the widening spread between oil
and natural gas prices is that it provides an incentive for producers to focus on oil production. The spread between oil and natural gas prices was 140% above the five-year average back in April. This caused a sharp decrease in the number of natural gas rigs in operation which reached the lowest level since 1999. Although the ratio has now
Natural Gas Surplus vs Henry Hub Price Weekly from Nov 9, 2008 to Nov 9, 2012
Max - Min Range
Sources: EIA, EFT Securities, Bloomberg 78 December 2012
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