Natural gas rallies

Natural Gas (NYMEX:HPM14) prices rallied yesterday as the market concern over a continuing underperformance in the weekly injections is starting to move higher on the list of issues ahead for the Nat Gas industry. As I have been discussing in the newsletter for months I do not expect the industry to replenish inventories back to the five year average ahead of the upcoming winter heating season.

So far this morning prices in natural gas are trading either side of unchanged and are at the technical range resistance level. If this level is solidly breached we could be on the way to a test of the psychological $5/mmbtu hit during the peak of the cold winter weather season this year.

My current start of season inventory projection is currently around 3.422 TCF based on a normal summer cooling season and an uneventful hurricane season. In the latest STEO report the EIA is projecting start of the winter heating season inventory level at about 3.599 TCF or about 4 percent above my current projection. In either case both projections are below the five year average start of winter inventory level of 3.848 TCF or about 12 percent above my current projection and 8 percent above the higher EIA inventory projection.

At the moment the latest projection for the upcoming cooling season from the May EIA STEO report (shown below) is mostly normal. The projected summer population weighted cooling degree days are projected to be just 1 percent above the ten year average and 5.7 percent above last year…a cooler than normal summer.

Yesterday the EIA released their latest Short Term Energy Outlook (STEO) report. Following are the main Nat Gas highlights.

  • Natural gas working inventories on April 25 totaled 0.98 trillion cubic feet (Tcf), 0.79 Tcf (45%) below the level at the same time a year ago and 0.98 Tcf (50%) below the previous five-year average (2009-13). Very cold weather and low inventories contributed to volatile Henry Hub natural gas spot prices over the past few months, increasing from $3.95 per million British thermal units (MMBtu) on January 10 to a high of $8.15/MMBtu on February 10, before falling back to $4.61/MMBtu on February 27, and then bouncing back up to $7.98/MMBtu on March 4. EIA expects that the Henry Hub natural gas spot price, which averaged $3.73/MMBtu in 2013, will average $4.74/MMBtu in 2014, $0.30 higher than in last month's STEO, and $4.33/MMBtu in 2015.
  • EIA expects total natural gas consumption will average 72.3 billion cubic feet per day (Bcf/d) in 2014, an increase of 1.3% from 2013, led by the industrial sector. In 2015, total natural gas consumption falls by 0.1 Bcf/d as a return to near-normal winter weather contributes to lower residential and commercial consumption. Higher natural gas prices this year contribute to a 0.4% decline in natural gas consumption in the power sector to 22.2 Bcf/d in 2014. EIA expects natural gas consumption in the power sector to increase to 23.1 Bcf/d in 2015 with the retirement of some coal plants.
  • EIA expects natural gas marketed production will grow by an average rate of 3.0% in 2014 and 1.8% in 2015. Rapid natural gas production growth in the Marcellus formation is contributing to falling natural gas forward prices in the Northeast, which often fall even with or below Henry Hub prices outside of peak winter demand months. Consequently, some drilling activity may move away from the Marcellus back to Gulf Coast plays such as the Haynesville and Barnett, where prices are closer to the Henry Hub spot price.
  • Liquefied natural gas (LNG) imports have declined over the past several years because higher prices in Europe and Asia are more attractive to sellers than the relatively low prices in the United States. Several companies are planning to build liquefaction capacity to export LNG from the United States. Cheniere Energy's Sabine Pass facility is expected to be the first to liquefy natural gas produced in the Lower 48 states for export. The facility has a total liquefaction capacity of 3 Bcf/d and is scheduled to come online in stages beginning in late 2015.
  • Growing domestic production over the past several years has displaced some pipeline imports from Canada, while exports to Mexico have increased. EIA projects net imports of 3.7 Bcf/d in 2014 and 3.1 Bcf/d in 2015, which would be the lowest level since 1987. Over the longer term, the EIA Annual Energy Outlook 2014 projects the United States will be a net exporter of natural gas beginning in 2018.
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