Natural gas outlook: Prices fall up to a quarter in some markets

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Infrastructure constraints in the Northeast, particularly in Northern Pennsylvania, have led Marcellus prices to diverge from the Henry Hub since May 2012.

Additionally, BENTEK Energy LLC (Bentek) reported that infrastructure constraints have led Northeast Pennsylvania production to flatten in recent weeks. Bentek estimates that more than 1,000 wells have been drilled but are not yet producing because of insufficient pipeline capacity. Several infrastructure projects have been proposed recently to help ease constraints in the region:

  • Earlier this month, Williams Partners LP (Williams) announced plans for a major infrastructure expansion in Pennsylvania that would expand capacity on its existing Transcontinental Pipeline’s Leidy Line by 800 million British thermal units (MMBtu) per day by late 2015. Williams, which received interest for the expansion from shippers in a recent non-binding open season, will begin the pre-filing process with the Federal Energy Regulatory Commission in early 2013. The expansion would serve the needs of gas distributors and power generators on the East Coast.
  • Tennessee Gas Pipeline recently announced a binding open season (when the pipeline obtains firm commitments for capacity from shippers) for its proposed Rose Lake Expansion Project, located in its Zone 4 area in Pennsylvania.
  • The project will add 230 million cubic feet per day of capacity. The entire system, which has about 13,900 miles of pipelines from the Gulf Coast, has existing capacity of 6.9 billion cubic feet (Bcf) per day.

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Overview:

(For the Week Ending Wednesday, August 1, 2012)

  • Natural gas prices declined for the report week (Wednesday to Wednesday) at many of the country’s trading locations, although a few points in the Northeast defied the trend. Algonquin Citygate (for delivery to Boston) began the week at $3.97 per MMBtu and rose to $4.24 per MMBtu yesterday, while the Henry Hub price closed at $2.96 per MMBtu, down 24 cents for the week.
  • The natural gas futures market sank a bit week-over-week. At the New York Mercantile Exchange (NYMEX), the September 2012 natural gas contract fell 23.8 cents per MMBtu to close at $2.933 per MMBtu yesterday.
  • Working natural gas in storage rose last week to 3,241 Bcf as of Friday, August 3, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). An implied storage build of 24 Bcf for the week moved storage levels 465 Bcf above year-ago levels.
  • The Baker Hughes Incorporated natural gas rotary rig count declined by 7 to 498 active units on the week ending August 3. The oil-directed rig count increased by 13 to 1,429 units.

More summary data

Prices:

Natural gas prices fell across most spot market locations, with the exception of certain Northeast and Marcellus pricing points. Spot prices fell by about 10 to 25 cents per MMBtu across most trading points for the week. Marcellus price points saw large price drops early in the week that had mostly rebounded by yesterday. Tennessee Zone 4 Marcellus increased by 19.2 percent week-on-week, beginning the week at $1.82 per MMBtu last Wednesday, falling to $1.40 per MMBtu on Friday, and jumping back up to conclude the week at $2.17 per MMBtu. Tennessee Zone 5 Line 300, which also serves the Marcellus region, ended the week down 2.1 percent, although it showed a similar pattern, moving from $2.34 per MMBtu last Wednesday, falling to $1.45 per MMBtu on Friday, and landing at $2.29 per MMBtu yesterday. The overall low prices in the Marcellus region are attributed largely to pipeline constraints. The Northeast saw warmer-than-normal weather, pushing the Algonquin Citygate (for delivery into Boston) price up 6.8 percent to finish the week at $4.24 per MMBtu.

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The NYMEX September 2012 futures contract fell by 7.5 percent from $3.171 per MMBtu last Wednesday to $2.933 per MMBtu yesterday. The settlement price dropped week-on-week after rising consistently throughout June and July. It fell to a low of $2.877 per MMBtu last Friday, and gained slightly thereafter. The 12-Month Strip (average of August 2012 to July 2013 contracts) fell by 2.9 percent, starting at $3.539 per MMBtu last Wednesday, dipping to $3.296 per MMBtu on Friday, and rebounding to $3.436 per MMBtu yesterday.

Total consumption for the report week showed an overall increase, driven by an uptick in natural gas consumed for power generation. According to Bentek estimates, natural gas consumption in the residential/commercial sectors fell by 1.5 percent, but was more than offset by an increase in consumption in the power and industrial sectors, which grew by 1.0 and 1.5 percent, respectively. Higher demand for electricity due to warmer temperatures in the Northeast outweighed a drop in demand in the Southeast stemming from cooler temperatures.

Supply fell by 0.3 percent week-on-week, driven by lower dry gas production. Bentek estimates a 0.4 percent drop in dry production for the report week, although it is nonetheless 2.2 percent higher than the same week last year. Imports from Canada increased by 1.3 percent, having little impact on the overall supply change. Similarly, liquefied natural gas (LNG) sendout had little effect on the overall change in supply. Despite increasing by 6.5 percent for the report week, LNG accounts for only a small fraction of overall supply and is now 42.3 percent below 2011 levels for the corresponding week.

More price data

Storage

Working natural gas in storage increased to 3,241 Bcf as of Friday, August 3, according to EIA’s WNGSR. This represents an implied net injection of 24 Bcf from the previous week. This week’s injection was 21 Bcf below the 5-year (2007-2011) average injection of 45 Bcf, and 7 Bcf below last year’s injection of 31 Bcf. Since April 27, injections of working natural gas into underground storage have fallen short of both year-ago levels and the 5-year average, although stocks remain well above historical levels. Inventories are currently 465 Bcf (16.8 percent) greater than last year at this time and 386 Bcf (13.5 percent) greater than the 5-year average.

Only one of the three storage regions posted an increase this week. Inventories in the East region increased by 30 Bcf (the 5-year average net injection is 44 Bcf). The West and Producing regions posted decreases of 1 Bcf (the 5-year average net injection is 5 Bcf) and 5 Bcf (the 5-year average net withdrawal is 4 Bcf), respectively. In the Producing Region, working natural gas inventories decreased 8 Bcf (3.4 percent) in salt cavern facilities and increased 1 Bcf (0.1 percent) in nonsalt cavern facilities.

Temperatures during the storage report week were 2.0 degrees warmer than the 30-year normal temperature and 2.0 degrees cooler than the same period last year. Temperatures in the Lower 48 States averaged 77.4 degrees, compared to 79.4 last year and the 30-year normal of 75.4. During the week all regions were warmer than normal, particularly the West South Central and West North Central divisions, which, respectively, averaged 4.1 and 3.9 degrees warmer than the 30-year normal.

More storage data


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