Capstone Energy Services

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Mid-Summer Natural Gas Fundamentals

July 29th, 2011

OMAHA (Capstone Energy Services) – Very hot weather continues to engulf the eastern two thirds of the country with but a few short term breaks in the Northern Plains and the Northeast. The National Weather Service predicts continuing hot weather for at least the next two weeks if not beyond. Heating load caused by the late cold spring followed by the current high cooling demand has created an unusual demand on storage. While inventories have clearly been affected, the situation does not appear to be a serious as one might expect. As of last week, inventories are close to the five year average in spite of the high demand. Granted the storage season began in November at a record level, but, then again, the five year average is also very high because both of the last two years have had record high or near record high inventories at this time of the season. This week’s report shows inventories still nearly 300 Bcf higher than the ten year average.

This broader supply perspective likely explains, in part, why natural gas futures prices remain locked in the low to mid $4.00 range with an occasional run up toward $5.00. Another factor restraining prices is the weekly storage report relative to market analyst expectation. While taking into consideration expected production and demand, including weather related generation, industry analysts make weekly predictions of reported injections in advance of the EIA Weekly Natural Gas Storage Report. For the last six weeks, they have almost always predicted storage injections lower than those reported, resulting in a price moving lower. One major reason for these low projections may well be underestimates of the new and increasing production volumes from onshore shale formations.

On June 27th the New York Times published a report regarding exaggerated deliverability and profitability of shale natural gas production. Since that time, EIA and others referenced in the report have defended their reserve and production estimates and questions the accuracy of the Times report. Since that time, BHP Billiton, an Australian mining conglomerate, announced acquisition of Petrohawk, a large U.S. shale producer after having earlier acquired the natural gas shale assets from Chesapeake Energy. ExxonMobil acquired XTO Energy late last year and announced on July 21st that they are looking for additional shale reserve acquisitions. This M&A activity by major energy companies suggests that shale gas profitability prognosis is good, despite the current relatively low natural gas prices.

While the current $4.30 NYMEX price may not result in high profitability for shale producers, many of the smaller ones likely need to maintain production or sell out while large producers are acquiring reserves and continuing exploration and production activities with an eye on the longer term. The recent string of higher than expected injections suggests that this may be the case, which, if it continues, could lead to another supply surplus this fall.

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By Ed Freeman

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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Energy Delivery Chains

Energy Delivery Chains

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Energy & the Environment

Energy & the Environment

How we assist clients in responding to national environmental concerns.

  • Initiate and manage a "Green" energy procurement program
  • Evaluate national legislative and regulatory initiatives
  • Research state and local energy efficiency programs and incentives
  • Track energy use and related emissions estimate