Natural gas outlook: Prices increase moderately, storage up, too

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Many key uncertainties in the AEO2013 projections are addressed through alternative cases

The Energy Information Administration’s (EIA) Annual Energy Outlook 2013 (AEO2013) presents long-term projections of energy supply, demand, and prices through 2040, based on results from EIA's National Energy Modeling System. This Monday marked the first stage of its release. This included publication of the “Market trends” section, which summarizes projections for energy markets under a Reference case, which assumes current laws and regulations, as well as alternative scenarios, including higher and lower levels of macroeconomic growth and resource availability.

Future levels of natural gas prices depend on many factors, including macroeconomic growth rates and expected rates of resource recovery from natural gas wells. Higher rates of economic growth lead to increased consumption of natural gas (primarily in response to higher levels of housing starts, commercial floorspace, and industrial output), causing more rapid depletion of natural gas resources and a more rapid increase in the cost of developing new production, which push natural gas prices higher. The converse is true in the Low Economic Growth case.

A lower rate of recovery from oil and gas wells implies higher costs per unit and higher prices. A higher rate of recovery implies lower costs per unit and lower prices. In comparison with the Reference case, the Low Oil and Gas Resource case assumes lower estimated ultimate recovery (EUR) from each shale well or tight well. The High Oil and Gas Resource case represents a more extreme case, with higher estimates for recoverable crude oil and natural gas resources in tight wells and shale formations and for offshore resources in the lower 48 states and Alaska.

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Prices:

Both the Henry Hub spot price and the Nymex May futures price recorded increases in the report week (Wednesday, April 10, to Wednesday, April 17). Spot natural gas prices at Henry Hub increased by 17 cents, ending the report week at $4.24 per MMBtu, the highest level since August 4, 2011. Similarly, the Nymex May futures price rose from $4.085 per MMBtu last Wednesday to $4.214 per MMBtu yesterday. During the week, the futures price spread over the Henry Hub daily spot price averaged between -9 and 3 cents per MMBtu. The 12-Month Strip (average of May 2013 to April 2014 contracts) gained 13 cents per MMBtu, starting at $4.239 per MMBtu last Wednesday and landing at $4.365 per MMBtu yesterday.

Weather likely contributed to changes in natural gas spot prices at trading points in certain parts of the country. In the Pacific Northwest, Rockies and Midwest, cold weather, along with a weekend snowstorm, likely contributed to spot natural gas price increases in these regions. In contrast, spot natural gas prices at Algonquin Citygate, for delivery into Boston, decreased by 29 cents to $4.65 per MMBtu. Warmer-than-normal temperatures in New England likely contributed to the price decreases.

According to estimates from Bentek, average natural gas consumption for the nation rose this report week by 1.6 percent over last week’s daily average. Natural gas consumption increased in the residential/commercial and power sectors by 0.8 and 4.5 percent, respectively, for the report week. Natural gas consumption in the industrial sector decreased modestly by 0.1 percent.

Bentek estimates that the average daily natural gas supply for this report week increased by 0.5 percent over the previous week’s daily average. Dry natural gas imports from Canada increased by 10 percent from the previous week and offset the decrease in U.S. dry natural gas production. Average U.S. dry natural gas production decreased by 0.2 percent from the previous week to 64.5 Bcf per day.

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Storage

Working natural gas in storage registered its first net injection for the season, increasing to 1,704 Bcf as of Friday, April 12, according to EIA's WNGSR. This represents an implied net injection of 31 Bcf from the previous week. Both the 5-year average and year-ago stock changes for the week were implied net injections of 39 Bcf and 21 Bcf, respectively. Inventories are currently 794 Bcf (31.8 percent) less than last year at this time and 74 Bcf (4.2 percent) below the 5-year average of 1,778 Bcf.

Two of the three storage regions posted increases this week. Inventories in the East and Producing regions increased by 19 Bcf (the 5-year average net injection is 20 Bcf) and 13 Bcf (the 5-year average net injection of 15 Bcf), respectively, while the West region posted a decline of 1 Bcf (compared to the 5-year average net injection of 4 Bcf). In the Producing region, working natural gas inventories increased 11 Bcf (6.5 percent) in salt cavern facilities and increased 2 Bcf (0.4 percent) in nonsalt cavern facilities.

Temperatures during the storage report week were 3.0 degrees warmer than the 30-year normal temperature and 1.1 degrees warmer than the same period last year. Temperatures in the Lower 48 states averaged 54.0 degrees, compared to 52.9 degrees last year and the 30-year normal of 51.0 degrees. While overall temperatures were a few degrees warmer than normal, temperatures varied somewhat across Census divisions. The Middle Atlantic Census division in the Northeast and the East South Central Census division in the South were relatively warm, averaging 6.0 and 5.6 degrees warmer, respectively, than the 30-year normal. In the Midwest, the West North Central Census division was relatively cool, averaging a degree cooler than the 30-year normal. Heating degree-days nationwide were 16.5 percent below normal and 7.5 percent below last year.

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