Record gas use by electric utilities, combined with production cuts from drillers stung by recent low prices, have combined to start an upward pricing trend, says Teri Viswanath of BNP Paribas Commodity Markets Strategy Group, in a May 11 market commentary.
The CME futures contract for Henry Hub, the US futures pricing point, has been languishing around $2/mmBtu for several months, and hit $1.82/mmBtu on April 20, a 10-year low. But since then, the month-ahead contract has climbed to $2.51 on May 11, a 37% change in just three weeks, as traders bet the market has hit bottom.
Some analysts including Goldman Sachs believe gas will hit $4 in 2013, but say the latest 2012 futures prices are too high. Morgan-Stanley analysts have put the end-2013 average at $3.95, as they see domestic production dropping and low prices stimulating power sector demand, but they also foresee little help for 2012 prices.
But the BNP Paribas analysis sees that sectoral demand as a structural shift that will push up gas consumption faster than expected, and sustain it.
One key: Viswanath foresees gas inventories topping out 200-300 Bcf below US Energy Information Administration (EIA) estimates this fall, moving natural gas prices up to an average of $2.76/mmBtu for 2012.
The Switch is On
The average was $4.04 in 2011, and the EIA currently estimates $2.45 for 2012.
Viswanath says a major factor is the latest EIA data showing coal-to-gas switching in every region of the US.
“The share of coal has fallen from providing roughly 56% of the nation’s electricity in the 1990s to just 37% so far in 2012,” Viswanath said. The fall-off in coal share has been abrupt, with coal providing nearly half of US electricity through 2008, and dropping below 40% only at the end of last year.
“While the industry has already flagged the displacement of mid-merit coal generators, the more recent data suggests that base load coal units are also under threat,” Viswanath said.
Merchant generators built more than 400 gigawatts of gas-fired capacity in the 1990s, and much of it has been underused until now, she noted.
With the Environmental Protection Agency’s new mercury regulations forcing decisions on upgrading or shutting many coal plants in the next three years, analysts generally see at least some of the shift away from coal as irreversible.
Statistics suggest that year-on-year power sector demand has risen 5.7 billion cubic feet per day in the current calendar quarter, Viswanath said, while pipeline receipts in May suggest a 7.5 Bcf/d growth. Part of the latter number may be due to several unplanned nuclear plant outages, she cautioned.
To read more about recent coal market fundamentals on Breaking Energy, click here.
The EIA says 2011 gas consumption averaged 66.7 Bcf/d, with 20.8 Bcf/d used for electric power. Between 2007 and 2011, 60% of the increase in US gas consumption was for electricity.
Analysts on all sides of the market have agreed that recent low natural gas prices were simply unsustainable, but just when production would drop or consumption rise has been unclear.
Producers have moved rigs out of dry gas areas and into wetter shales producing natural gas liquids and oils. But natural gas is coproduced with those far more profitable fossil fuels, and this “byproduct” output means natural gas production has continued to climb.
Also, Energy Solutions Inc. said in a February study, producers have about 3,000 gas wells completed but not yet producing, ready to go should natural gas prices begin a steep climb.