By OGJ editors
HOUSTON, Apr. 2 -- Several variables have resulted in natural gas prices rising by more than 50% on the New York Mercantile Exchange since mid February. Chief among them are a 30% spike in crude oil prices, tensions in the Middle East, and concerns over US nuclear power capacity.
Other considerations are positive gas storage trends and a drought in the US Northeast.
NYMEX gas for May delivery closed Apr. 1 at $3.53/MMbtu, putting the near-month futures gas contract up more than $1.25/MMbtu since mid-February's daily closings of $2.18-2.25/MMbtu.
Nuclear concerns
Natural gas markets clearly faced upward price pressure after some significant corrosion problems were found at the Davis-Besse nuclear reactor in Oak Harbor, Ohio. The Nuclear Regulatory Commission has said it might impose mandatory inspections and possibly shutdowns on similar nuclear plants (OGJ,, Apr. 1, 2002, p. 5).
"A worst case estimate suggests that over 5 bcfd of gas demand could be added if 40,000 Mw [two-thirds of the nuclear plant power capacity potentially impacted, out of a total of 65,000 Mw] are taken offline," said David A. Pursell of Simmons & Company Inc. in a research note.
Even if only 8,000 Mw of nuclear power capacity is impacted, it would increase natural gas demand by 1 bcfd until the problems are resolved, he said.
The US has 69 plants with reactor designs similar to the Davis-Besse unit. This represents 71% of the nation's nuclear power capacity. Meanwhile, 20,000 Mw of the 65,000 Mw potentially affected already is scheduled for refueling outages by June.
Crude oil prices
Natural gas prices also have been pulled along with spiking crude oil prices, which could go higher given circumstances such as military action against Iraq, Pursell said, noting US President George W. Bush's "axis of evil" remark in the State of the Union address. He lumped Iran, Iraq, and North Korea together in the fight against terrorism.
Oil prices also have been driven by successful efforts to curb oil production coordinated by the Organization of Petroleum Exporting Countries in concert with some key non-OPEC oil exporters.
Another factor in oil price strength has been a string of bullish weekly US oil inventory reports suggesting a rebound in demand fueled by economic recovery.
"The historical relationship between natural gas and fuel oil prices [a proxy for crude oil prices] suggests that the concurrent increase in crude oil and natural gas prices is not coincidental," Pursell said.
Positive gas trends
Weekly gas storage numbers began to improve in February when adjusted for weather and compared to both the 7-year average withdrawals and withdrawals earlier this year.
"This was clearly a catalyst for natural gas prices to increase. However, we believe there is a chance that the outperformance seen in the February and early March withdrawals was based on increased gas-fired power demand due to unusually high maintenance of nuclear [nuclear running approximately 93% utilization compared to our assumption of 97% utilization] and coal power plants," Pursell said.
He said he plans to watch inventory data in coming weeks to prove or disprove this thesis.
Drought in the US Northeast
The northeastern US is experiencing a drought that could negatively impact hydropower generating capacity. Negative impacts on hydroelectric generating capacity could potentially increase gas demand by 300-700 MMcfd, he said. The Northeast has 25,000 Mw of hydroelectric generating capacity.
"It is difficult to know how much generation could be impacted, but we would be surprised if low water levels had a huge impact on coal and nuclear utilization," he said.
