Prices for natural gas are headed lower after a hot summer showed signs of the first boost in pricing for the fuel on which the US energy sector is increasingly relying.
With the approaching end of the cooling season and continued strong supply from domestic gas producers, prices are likely to revert to their earlier trading range between $2 and $3 per million BTU, predicted Michael Lynch, president of Strategic Energy and Economic Research, a Massachusetts consultancy.
New evidence on bulging US inventories of natural gas, coupled with abundant supply and the approaching end of the summer cooling season, suggests prices will resume their downward path after a brief spike driven by power-sector demand.
The amount of gas in underground storage exceeded 3,000 billion cubic feet in June, the highest ever for the month, resulting in the smallest inventory increase between April and June – when stocks begin to build ahead of the upcoming winter – since 2000, the US Energy Information Administration said.
The modest increase, of only 565 bcf, was also caused by strong demand from the power sector in response to high demand for electricity to power air conditioners during an unusually hot US summer. That pushed natural gas futures prices to $3.214 per million BTU at the end of July, their highest since December last year, after hitting a decade-low of $1.907 in April.
High inventory levels will persist during the “injection season” which runs from April to October, the EIA said in a report on August 8. The agency forecast gas stocks will rise to a record high of almost 4,000 bcf by Nov. 1, leaving the seasonal increase at only 1,477 bcf, the lowest since 1991.
Warm Winters Mean Full Inventories
Inventories were already unusually full at the start of the injection season because of reduced demand for heating gas in the exceptionally warm 2011-12 winter. That, coupled with the modest addition so far this season, has left underground storage capacity about 75 percent full, a level not normally seen until late August or early September, the EIA said.
“The slow start to the injection season reflects record-high inventories at the end of this winter, leaving less space to be filled, and a large increase in natural gas use by the U.S. electric sector for power generation,” the EIA said.
Although the number of active drilling rigs has dropped sharply this year in response to falling dry-gas prices, production has continued to grow because of gas supply associated with more lucrative oil and liquids development, and because existing gas wells have not depleted as quickly as expected, Michael Lynch said.
Despite the recent low prices, U.S. dry-gas output rose 5 percent in the first half of 2012 compared with the year-ago period, the EIA said in a separate report, citing research from Bentek Energy. The growth was largely driven by the Marcellus Shale in Pennsylvania and surrounding states, where production almost doubled in the 12 months to June 2012 and now contributes 9 percent of national production.
Plentiful supply, coupled with high inventories and mild winter weather, resulted in price declines of up to 49 percent during the first half of 2012 compared with a year earlier, the EIA said.
Although prices rebounded to the high $2 range by the end of June, they are not likely to top $3 again for the foreseeable future because of increasing production and weak residential demand growth in the sluggish economy, Lynch said.
Gas at $2-3 will likely persuade more power generators to scrap old coal plants in favor of cleaner gas, but that may not be enough to buoy prices much above their current range, given record inventories and, in the short term, declining demand for air conditioning.
Gas futures prices have declined since their late-July high. The front-month NYMEX contract ended at $2.79 on Aug. 13, down 18 cents from a week ago, and $1.31 lower than a year earlier. Read more about CME Group’s Nymex trading platform and how it is evolving here.
“We are coming to the end of the summer cooling season so we are going to see some of that consumption back off,” Lynch said.
