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Natural Gas 2014 – A Look Forward

January 16th, 2014

OMAHA (Capstone Energy Services) – The average NYMEX Last Day Settlement price in 2013 was $3.652 per MMbtu up 31% from the 2012 low of $2.789 per MMbtu. The increase was caused, in part, by a surge of late winter cold weather that reduced April 1 storage inventories 800 Bcf below the previous year. Prices remained in the high $3.00 / Low $4.00 range through mid-summer, dropping back to the mid-$3.00 range into the fall. The December 2013 cold spell pushed the January 2014 contract back up to $4.407 per MMbtu. The February contract remains in the $4.00 – $4.50 per MMbtu range, bolstered by the Arctic cold last week and the week before. Storage inventories this winter are already nearly 659 Bcf below the same time last year with additional colder than normal weather predicted to move into the eastern half of the country late next week. The balance of this winter will set the stage for prices for the remainder of the year – a warmer than normal Feb-Mar will likely bring prices down to $4.00 or below while a colder than normal Feb-Mar could end the winter at $4.50 or above.

One factor that will keep pressure on prices will be production, which is expected to increase in 2014 in spite of the natural gas rig count that has dropped nearly 19%, from 439 to 357 since January 2013. The Energy Information Administration projects that marketed production in the U.S., excluding Alaska, will increase by 2.1% or about 1.5 Bcf per day in 2014 compared to 2013 due to drilling efficiency gains and increased pipeline deliverability.

On the demand side, however, concerns remain. Bentek issued a report this week that projects a large increase in the 2014 vs. 2013 natural gas generation requirements to replace nuclear units down for refueling this year. The additional gas requirements are estimated to be up to 1 Bcf per day while the units are down this spring. Also adding to demand will be new natural gas fired electric generation facilities. EIA data shows 6,427 MW of net (additions minus retirements) new facilities compared to 3,868 MW in 2013. As always, the extent of summer cooling demand requirements will determine the amount of natural gas requirements for generation. The increasing percentage of natural gas in the U.S. generation fleet will mean higher demand for natural gas during peak summer use periods.

If natural gas prices are at the high end of the $4.00-$4.50 range or higher at the end of March, expectations of the summer cooling load will likely sustain those high prices through most of the summer. If prices are at the low end of the range or lower, then a rise in prices will likely occur as summer approaches. Prices will probably drop in the fall, but the extent of the decline will depend on the status of storage inventories and early forecasts for the upcoming winter.

Factors to watch:

  • Storage – Some analysts are already projecting that storage inventories on April 1st will be at 1,300 Bcf, which would be the lowest since the 2007-2008 winter. If those projections begin to move lower, then prices will likely stay up through the summer.

 

  • Summer Cooling Load – The biggest uncertainty will be the effect that new and existing natural gas generation will have on the overall supply situation. Obviously, part of the uncertainty is weather. Another factor will be the extent that natural gas replaces coal for base load needs for both economic and environmental reasons.

 

  • Infrastructure – A surplus of production exists in the Marcellus Shale, as demonstrated by the huge price differential between NYMEX and the region. ($4.407 vs. $3.00 in January) These additional supplies, if and when they become available in 2014, will definitely help to alleviate some of the supply concerns.

 

Looking ahead to the balance of 2014, many uncertainties exist in the natural gas market. This will possibly lead to increased market speculation and the resulting volatility, which will require closer monitoring than during the last few years.

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By Ed Freeman

Energy Facts

Energy Facts

Natural gas can be used as a raw material in a variety of products, including paint, fertilizer, plastics and medicines.

Natural gas produces fewer emissions than other fossil fuels, with less nitrogen, sulfur, carbon and fine particulates.

Texas produces the largest amount of natural gas in the USA.

The biggest consumer of coal in the US is the electric power sector.

There are 17,658 electric utility generators in the USA.
 

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