Natural gas outlook: Isaac causes modest delay

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Peak shut-in natural gas production in the Federal Offshore Gulf of Mexico (GOM) during Hurricane Isaac was about 3.2 billion cubic feet (Bcf) per day. Isaac was sufficiently powerful to force evacuation of 85% of production platforms and shut-in 73% of GOM natural gas production (at peak). However, Isaac’s impact on overall U.S. natural gas production was relatively modest, representing only 4.7% of average daily natural gas production in 2012.

While the shut-ins associated with Isaac represented a significant portion of GOM production, the impact on the domestic market was less severe than it might have been in the past because GOM production represents a smaller portion of total U.S. production today than 5 to 10 years ago due to the dual effect of waning GOM production and increasing onshore production. The graph to the left shows Isaac’s peak shut-in volume as a share of total average daily U.S. natural gas production from 2000 to present. The declining share after 2006 underscores the diminishing contribution of the GOM to overall U.S. natural gas production.

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Prices:

Natural gas prices rose across most spot market locations, most notably at Algonquin Citygate. Algonquin Citygate, which delivers natural gas to Boston, saw price gains well above other trading points due to unseasonably warm weather. Algonquin began the week at $2.99 per MMBtu, and ended at $3.55 per MMBtu, a gain of 56 cents, or 18.7 percent. The Henry Hub showed comparatively modest gains, more in line with other trading points. The Henry Hub price rose from $2.63 per MMBtu last Wednesday to $2.87 yesterday, an increase of 24 cents, or 9.1 percent. Although many Hurricane Isaac-related production outages in the Gulf of Mexico were restored this week, both Texas and the Southeast experienced above-normal temperatures, offsetting restored Gulf production with additional demand for natural gas for power generation.

The NYMEX October 2012 futures contract increased from $2.685 per MMBtu last Wednesday to $2.795 per MMBtu yesterday, an increase of 11 cents, or 4.1 percent. The October settlement price rose week-on-week after falling through much of September. The 12-Month Strip (average of October 2012 to September 2013 contracts) similarly gained 13 cents, starting at $3.163 per MMBtu last Wednesday and settling at $3.290 per MMBtu yesterday. Both the NYMEX futures price and the 12-Month Strip fell a few cents yesterday, a phenomenon that did not occur in spot markets.

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Total consumption across the report week showed an increase, driven by power generation. According to BENTEK Energy LLC (Bentek) estimates, consumption in the industrial and residential/commercial sectors fell by 1.6 percent and 4.3 percent, respectively, but was more than offset by a jump in consumption for power generation, which increased by 7.2 percent. The top three regions that consume natural gas for electricity all increased their consumption week-on-week. The Southeast (the largest consumer) burned 8.3 percent more natural gas for electric generation, and the Northeast and Texas consumed 3.6 percent and 16.7 percent more natural gas, respectively, in this sector. Overall natural gas consumption for power was up 24.5 percent compared to the corresponding week last year.

Supply for the week fell by 1.6 percent week-on-week, driven by lower dry gas production. Bentek estimates a 1.8 percent drop in dry production, although still 0.8 percent above this week last year. While imports from Canada increased by 1.2 percent, they had little impact on overall supply. As of Wednesday, September 5, about 1.2 Bcf per day of natural gas production in the Gulf of Mexico was still shut-in, accounting for approximately 26 percent of total Gulf natural gas production, down from 72 percent the previous Wednesday.

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Storage

Working natural gas in storage increased to 3,402 Bcf as of Friday, August 31, according to EIA’s WNGSR. This represents an implied net injection of 28 Bcf from the previous week. This week’s injection was 32 Bcf below the 5-year (2007-2011) average injection of 60 Bcf, and 34 Bcf below last year’s injection of 62 Bcf. Inventories are currently 395 Bcf (13.1 percent) greater than last year at this time and 329 Bcf (10.7 percent) greater than the 5-year average.

Two of the three storage regions posted increases this week. Inventories in the East and West regions increased by 34 Bcf (the 5-year average net injection is 50 Bcf) and 1 Bcf (the 5-year average net injection is 3 Bcf), respectively. The Producing region posted a decrease of 7 Bcf (the 5-year average net injection is 8 Bcf). In the Producing Region, working natural gas inventories decreased 6 Bcf (2.6 percent) in salt cavern facilities and remained at the previous week’s level in nonsalt cavern facilities.

Temperatures during the storage report week were 2.7 degrees warmer than the 30-year normal temperature and 0.1 degrees cooler than the same period last year. Temperatures in the lower 48 States averaged 74.9 degrees, compared to 75.0 last year and the 30-year normal of 72.1. During the week all regions were warmer than normal, particularly the West North Central and the East North Central Census divisions in the Midwest, which, respectively, averaged 5.3 and 4.7 degrees warmer than the 30-year normal.

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