Natural gas outlook: Storage up to record levels

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Prices
Movement in the Henry Hub day-ahead price reflected the decline of other trading locations in this week’s cash market by falling 12.4 percent from $3.55 per MMBtu the previous Wednesday to $3.11 per MMBtu yesterday. As the accompanying table shows, the Henry Hub cash price progressed steadily downwards with five days of consecutive losses as end-use markets cut back on immediate gas consumption.

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At the NYMEX, the December 2011 contract fell 30.8 cents (8.4 percent) over five consecutive days from $3.652 per MMBtu last Wednesday to $3.344 per MMBtu yesterday. Over the same period, the January 2012 and February 2012 natural gas futures contracts dropped 26.6 cents and 26.5 cents per MMBtu, respectively, illustrating the potential impacts high storage levels coupled with continued robust production could have on gas prices this coming winter.

All trading locations responded with lower prices stemming from lack of weather load this week. Spot prices at Transcontinental Pipeline’s Zone 6 trading point for delivery into New York City, which started the week at $3.82 per MMBtu, showed a 34 cent price loss per MMBtu over the week (Wednesday to Wednesday) to close at $3.48 per MMBtu (down 8.9 percent). Over the same period, the Chicago citygate spot price registered a somewhat larger 41 cent per MMBtu price loss (also from $3.82 per MMBtu last Wednesday) and ended the week at $3.41 per MMBtu (down 10.7 percent).

In the midst of generally mild fall temperatures and the absence of any significantly colder weather load, consumption posted a modest decrease for the week. According to estimates from BENTEK Energy Services, LLC (BENTEK), domestic gas consumption decreased by 2.4 percent over last week. The residential/commercial sector led the decline with a 5.3 percent loss while the industrial sector tallied the only gain with a 0.4 percent increase. The power sector posted a 1.2 percent drop reflecting the light weather load at the end of last week.

Consistent with the week’s lethargic consumption pattern and clear price slide, overall supply was off slightly. According to BENTEK estimates, the week’s overall average total gas supply posted a 0.4 percent decrease from last week’s level. Domestic weekly dry gas production averaged 63.5 Bcf per day, 0.5 percent lower than the previous week. Domestic dry gas production now stands 8.4 percent above this time last year. The slight fall in this week’s dry gas production was partially offset by a 0.6 percent increase in Canadian imports which averaged 4.7 Bcf per day over the period. Canadian imports stand 3.4 percent above year-ago volumes for the same week. There were modest supply gains registered in the liquefied natural gas (LNG) arena during the week where imports averaged 408 million cubic feet (MMcf) per day and remain 34.6 percent below year-ago levels.

More Price Data

Storage
Working natural gas in storage rose to 3,850 Bcf as of Friday, November 11, according to EIA’s WNGSR (see Storage Figure). This represents an implied net injection of 19 Bcf, higher than the 5-year average injection of 10 Bcf and last year’s draw of 1 Bcf. Weekly stocks reached an all time high, surpassing the previous weekly record of 3,840 Bcf from November 5, 2010.

While stocks are only slightly above last year’s levels, high production could mean another record setting week of injections. Weather will be a major factor as always. As of November 11, East and Producing Region stocks were respectively 14 Bcf and 9 Bcf above last year’s levels while the West Region is just 8 Bcf below last year’s level after a relatively cold week in the region.

Temperatures during the week ending November 10 were about 0.3 degrees cooler than the 30-year normal temperature level (see Temperature Maps and Data). Regionally, temperatures were very mixed. The Mountain and Pacific Divisions comprising most Western states were 5.1 and 6.1 degrees cooler than normal but the Midwest and Northeastern Divisions all saw above normal temperatures. The Southern divisions were mixed but close to normal for this time of year. Nationwide, heating-degree days matched normal levels.

More Storage Data

Other Market Trends
Rig Count Drops to 877. The natural gas rotary rig count declined by 30 to 877 for the week ending November 11, 2011, according to data released by Baker Hughes Incorporated. This is the second consecutive decline, and this week’s decline follows another relatively large decline of 27 rigs posted last week. The natural gas rig count has fallen back to its lowest level since July 29, 2011. Natural gas rigs currently are far below levels close to 1,600 reached in the fall of 2008, but production has continued to rise. Some of the increases in production are from natural gas associated with oil production; oil rigs are currently at 1,133, and have steadily increased for the past couple of years. Efficiency gains, specifically in shale drilling, have also likely buoyed production levels in spite of declines in the rig count.

2011 LNG Re-Exports Expand in 2011. According to data released by the U.S. Department of Energy’s Office of Fossil Energy, 2011 LNG re-exports through September have totaled 42.4 Bcf for 2011. Total 2010 LNG re-exports were 34.5 Bcf. The two countries receiving the largest amounts of re-exports are Brazil and India, while South Korea, Japan, Spain, China, and the United Kingdom have also received cargoes. In the past few years, natural gas prices in the United States have been low compared with other destinations, and it is not uncommon for Japan spot prices to rise above $15 per MMBtu. While lower than prices in Asia, European prices (particularly, Zeebrugge in Belgium and the National Balancing Point in the United Kingdom) are often several dollars greater than U. S. prices. Since cargoes can attract much higher prices elsewhere, it is profitable to re-export cargoes from U.S. LNG terminals that have the capability to do so. All re-export cargoes from the United States have left from the Gulf of Mexico, with Cheniere’s Sabine Pass terminal the most active re-exporter. Cheniere plans to convert its Sabine Pass terminal to a liquefaction terminal, and hopes to export domestically produced natural gas. The company has received approval to export from the U.S. Department of Energy, but is still awaiting approval from the Federal Energy Regulatory Commission.

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