Natural gas prices in the US have reached a 4-month low as of this writing, and the gloom seems to be settling in for the industry.
The main cause of that gloom is the focus on storage data, which don't look promising for the second half. Although the cooling season has been warmer than normal to date, slowing down the pace of injection into storage a bit, it has not been enough to quell mounting concerns over a burgeoning storage surplus.
At last report, the year-over-year storage surplus fell to 379 bcf from 419 bcf (revised) the week before and 450 bcf the week prior to that.
However, if historic injection patterns hold, the size of declines in the storage surplus in the weeks to come are likely to be much smaller. As of mid-July, US gas in storage was running about 400 bcf over the previous 5-year average. And it will take an injection rate of only about 40 bcf/week to reach the 3 tcf level widely considered the heating season watershed Nov. 1. That's about 20 bcf/week less than is usual for the same period of the last 5 years.
New power capacity
There are nevertheless some bullish signs on the horizon.
Chief among them is a new spurt of gas-fired power capacity. According to the National Electric Reliability Council, 55,000 Mw of new gas-fired capacity will have started up in US during October 2001-September 2002.
Says Energy Security Analysis Inc., Boston: "New gas-fired generating capacity added since last summer is expected to make up a significant portion of NERC's projected summer's generating reserves."
ESAI Senior Analyst Mary Menino estimated the additional gas demand from this new capacity at almost 4 bcfd, which she contends will place a burden on both producing basins and on interstate pipeline capacity.
Other bullish signs
At the same time, oil prices have held up strongly despite a lessening of violence in the Middle East and a slowdown in US-Iraq saber-rattling.
Offsetting these trends is a renewed deterioration of civic order in Venezuela, as the prospect of another supply disruption looms in that country.
The state of oil prices is important to gas prices because of the growing correlation between the two. According to CIBC World Markets Inc., gas prices and oil prices have been 93% correlated since the start of the year. That compares with a 63% correlation between the two in the previous 3 years.
Meanwhile, Raymond James & Associates Inc., St. Petersburg, Fla., continues to assert that a major natural gas supply shortage is looming, as early as this coming winter. RJA points to its estimate of a 6% drop in US gas production this summer vs. last summer.
But economists with consulting firm C.H. Guernsey & Co., Oklahoma City, noted that, "ellipseeven if we adjust the injection rate of 2001 by the 6% decline in production experienced in the first 2 months of the year, the amount of gas in storage at Oct. 31 will still be 3,107 bcf. This is a storage level that is 5% higher than the 5-year average."
Another bear rears up in the form of a fitfully sluggish economic recovery. Industrial consumption of gas in the US, while increasing by 600 MMcfd since December, notes CIBC, is recovering at half the rate of previous severe manufacturing recessions.
Salvation in weather
Now that gas futures prices have pierced the $3/MMbtu floor, will July be the bottom of the price curve? Perhaps the best way to answer that question is to ask another: Whither the weather in the weeks ahead?
Gas markets now must look increasingly to a sustained heat wave and that new gas-fired power capacity to sop up the storage surplus.
In the near term, however, the outlook is for lackluster cooling demand for gas, noted Ron Barone, analyst with UBS Warburg, in a July 12 research note.
Here's a thought: California is facing power shortfalls again, Texas is flush with power, and San Franciscans are sniping about Houston's muggy weather in the competition to land the 2012 Olympics.
Maybe Texas could add some gas-fired power capacity and sell the surplus power (at a perfectly reasonable rate, of course) to California.
In exchange, California could let Houston export some of its surplus heat and humidity to oft-chilly San Francisco.
Win-win, anyone?
(Online July 12, 2002; author's e-mail: [email protected])
