Natural gas outlook: Prices higher across the board

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Natural gas drilling activity in the U.S. Gulf of Mexico (GOM) generally increased over the past year, despite a drop in natural gas prices over much of the same period.

During September 2012, the average number of rigs actively drilling for natural gas in the GOM each week was more than double the average weekly count for September 2011, according to data provided by Baker Hughes Incorporated. Virtually all of these rigs were positioned in shallow water (water depth up to 500 feet).

The higher shallow water natural gas rig count reflects, in part, the resumption of well permitting by the Bureau of Safety and Environmental Enforcement (BSEE). According to BSEE, 162 applications for new shallow water wells have been submitted since the June 8, 2010 implementation of new safety and environmental standards (in response to the Macondo well blowout in April 2010). Of these (and an additional 20 applications submitted prior to June 8, 2010), only 6 were pending approval as of October 3, 2012. A second factor likely helping to boost shallow water GOM drilling activity is the comparatively high prices producers fetch for natural gas liquids extracted from the natural gas production stream.

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Prices:

Natural gas prices rose across most spot market locations. Henry Hub rose from $2.92 per MMBtu last Wednesday to $3.21 yesterday, an increase of 29 cents per MMBtu, or 10 percent. Other trading points also generally increased, with most showing gains ranging from about 20 to 40 cents per MMBtu. Algonquin Citygate, which delivers natural gas to Boston, saw price gains at the higher end of the range, likely owing to cooling New England weather. It began the reporting week at $3.18 per MMBtu and ended at $3.59 per MMBtu, a gain of 41 cents per MMBtu, or 13 percent.

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The NYMEX futures price increased week-on-week, persistently above most spot prices. The NYMEX price rose from $3.023 per MMBtu last Wednesday to $3.395 per MMBtu yesterday. On Thursday, the first day of the November near-month futures contract, the NYMEX closed at $3.297 per MMBtu, 29 cents per MMBtu higher than the Henry Hub spot price. The futures price continued to climb throughout the week, peaking at $3.531 per MMBtu on Tuesday, and before dropping back to $3.395 per MMBtu yesterday. The 12-Month Strip (average of November 2012 to October 2013 contracts) gained 19 cents per MMBtu, starting at $3.578 per MMBtu last Wednesday and landing at $3.771 per MMBtu yesterday.

Total demand for the report week showed an overall slight decrease. According to estimates from BENTEK Energy LLC (Bentek), overall natural gas consumption for the nation fell by 0.3 percent. Consumption in the industrial and residential/commercial sectors fell by 1.3 percent and 4.4 percent respectively, which was nearly offset by an increase in natural gas consumed for power generation, which increased by 2.7 percent. The Southeast, which is the region with the largest consumption of natural gas for power generation, burned 11.7 percent more gas this week than last week. Texas, the state with the largest consumption of natural gas for power, burned 12 percent less gas this week, although the net result was a week-on-week increase in total U.S. natural gas demand for power.

Total supply for the report week showed a slight overall increase. Bentek estimates that overall supply, which averaged about 70.2 Bcf per day across the report week, rose by 0.3 percent, driven by a 0.2 percent rise in production. Imports from Canada increased by 1.0 percent, having a slight positive effect on overall supply. This was driven by the West, where imports were up 8.2 percent over the previous reporting week and 23.8 percent above this week last year.

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Storage

Working natural gas in storage increased to 3,653 Bcf as of Friday, September 28, according to EIA’s WNGSR. This represents an implied net injection of 77 Bcf from the previous week. This week’s injection was 1 Bcf below the 5-year (2007-2011) average injection of 78 Bcf, and 24 Bcf below last year’s injection of 101 Bcf. Inventories are currently 272 Bcf (8.0 percent) greater than last year at this time and 281 Bcf (8.3 percent) greater than the 5-year average.

All three storage regions posted increases this week. Inventories in the East, West, and Producing regions increased by 42 Bcf (the 5-year average net injection is 47 Bcf), 8 Bcf (the 5-year average net injection is 9 Bcf), and 27 Bcf (the 5-year average net injection is 23 Bcf), respectively. In the Producing region, working natural gas inventories increased 13 Bcf (5.6 percent) in salt cavern facilities and increased 14 Bcf (1.5 percent) in nonsalt cavern facilities.

Temperatures during the storage report week were 0.4 degrees cooler than the 30-year normal temperature and 3.4 degrees cooler than the same period last year. Temperatures in the lower 48 States averaged 64.3 degrees, compared to 67.7 last year and the 30-year normal of 64.7 degrees. While overall temperatures were a little cooler than normal, temperatures varied somewhat across Census divisions. In the Midwest, temperatures in the East North Central and West North Central Census divisions were cool, averaging 5.1 and 4.1 degrees cooler, respectively, than the 30-year normal. In the West, the Mountain and Pacific Census divisions were particularly warm, averaging 4.6 and 4.0 degrees warmer, respectively, than the 30-year normal.

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