Natural gas outlook: Hot temperatures boost prices, usage

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Marketed Production and Electric Power Generation Show Strong Growth in 2011.

Marketed production of natural gas rose by 7.9% year over year in 2011, to an average of 66.2 billion cubic feet (Bcf) per day, the largest year-over-year change since 1984, according to the U.S. Energy Information Administration's recently released Natural Gas Year in Review. Despite falling natural gas rig counts, continued improvements in drilling efficiencies helped generate further production growth. Increased production in 2011 contributed to strength in storage inventories, as working stocks hit new records at the end of the injection season.

The electric power sector absorbed some of the increased supplies of natural gas, and continues to do so. Use of natural gas for electric power generation continued an overall upward trend, as natural gas prices fell both in absolute terms and relative to coal prices, providing an incentive for fuel substitution. Use of natural gas for electric power rose to 21.6 Bcf per day in 2011 from 21.0 Bcf per day in 2010. Major consuming regions in the eastern United States saw natural gas consumed for electric power generation significantly exceed the average of the previous five years.

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Prices:

The Henry Hub day-ahead price registered an overall increase for the week, rising sharply through Monday before declining on Tuesday and increasing modestly Wednesday, closing the week at $2.84 per MMBtu, up 4.4 percent. In the midwest and northeast, hotter-than-normal temperatures boosted prices over much of the reporting week, after which cooler weather helped generate reductions in end-of-week prices.

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At the NYMEX, the August 2012 contract ended the week higher, rising from $2.853 per MMBtu last Wednesday to $2.973 per MMBtu yesterday, an overall increase of 4.2 percent. Prices rose modestly on Thursday, reflecting, in part, a temporary return to above-normal temperatures for several parts of the nation. Prices declined on Monday and Tuesday before jumping nearly 18 cents yesterday. The 12-Month Strip (average of August 2012 to July 2013 contracts) also rose late last week before dipping Monday and Tuesday, then rebounding yesterday to close at $3.359 per MMBtu, up 4.8 cents per MMBtu (1.4 percent) for the week.

Prices at many downstream trading locations recorded overall increases, climbing on Thursday and Friday before dipping toward the end of the week. In the northeast, certain locations saw prices rise considerably before retreating by week's end. For example, at the Algonquin Citygate trading point, for delivery into Boston, spot prices started the reporting week at $3.40 per MMBtu, rose to $6.27 per MMBtu on Monday as temperatures were expected to approach 100 degrees (following transportation restrictions), then fell steadily to close yesterday at $3.52 per MMBtu (up 3.5 percent for the week). Prices at the Transcontinental Pipeline's Zone 6 trading point, which serves New York City markets rose from $2.93 per MMBtu last Wednesday to $3.42 per MMBtu on Monday (ahead of 100-degree peak temperatures), then declined to $3.08 per MMBtu by week's end (up 5.1 percent).

Total consumption for the report week registered an overall decrease, with slightly higher residential/commercial sector demand being offset by decreases in other sectors. According to estimates from BENTEK Energy LLC (Bentek), domestic natural gas consumption declined by 1.6 percent from last week, driven by a decrease of 2.7 percent in power sector consumption. Industrial and residential/commercial sector consumption ended the week relatively unchanged down 0.4 percent and up 0.2 percent, respectively. For the power sector, consumption exceeded levels for the same week last year by 15.7 percent.

Total supply for the week was essentially unchanged, registered an overall increase of 0.1 percent. According to Bentek estimates, domestic weekly dry gas production was also 0.1 percent lower than the previous week (although 4.0 percent above the same time last year). Imports from Canada rose by 2.7 percent, with increases in shipments to the northeast and midwest offsetting declines in the west. For the week, imports from Canada stand only 0.2 percent above year-ago volumes. Liquefied natural gas (LNG) sendout dropped sharply, down 19.8 percent from last week; sendout volumes remain well below (23.3 percent) year-ago levels.

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Storage

Working natural gas in storage increased to 3,163 Bcf as of Friday, July 13, according to EIA's WNGSR. This represents an implied net injection of 28 Bcf from the previous week. This week's injection was 46 Bcf below the 5-year (2007-2011) injection of 74 Bcf, and 39 Bcf below last year's injection of 67 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 509 Bcf greater than last year at this time and 470 Bcf greater than the 5-year average.

All three storage regions posted increases this week.Inventories in the East, West, and Producing Regions increased by 23 Bcf (with the 5-year average net injection of 54 Bcf), 4 Bcf (with the 5-year average net injection of 10 Bcf), and 1 Bcf (with the 5-year average net injection of 11 Bcf), respectively. In the Producing Region, working natural gas inventories decreased 4 Bcf in salt cavern facilities and increased 5 Bcf in nonsalt cavern facilities.

Temperatures during the storage report week were 3.3 degrees warmer than the 30-year normal temperature and 0.6 degrees warmer than the same period last year. Temperatures in the lower 48 States averaged 78.1 degrees, compared to 77.6 last year and the 30-year normal of 74.9. During the week, all regions were warmer than normal, particularly the East North Central and Middle Atlantic Census divisions, which averaged 5.6 and 4.1 degrees, respectively, warmer than the 30-year normal.

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