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Winter Fallout

April 11th, 2014

OMAHA (Capstone Energy Services) – As the winter heating season comes to a close, the aftermath of this much colder than normal winter is beginning to come into focus. Storage inventories ended the winter at 822 Bcf, the lowest level in more than ten years. In order to refill storage to a comfortable level of 3,500 Bcf, injections this summer will need to be close to 2,700 Bcf, which is 200 Bcf more than the largest summer injection in the last 15 years. On the plus side, the Energy Information Administration continues to project increased domestic natural gas production primarily due to ongoing exploration and production from new onshore shale formations. At the same time, increased domestic supply and low domestic natural gas prices, particularly in relation to international markets, has fostered new and expanded industrial facilities and numerous export projects. The movement toward cleaner power generation is transforming the makeup of the electric generation industry away from coal toward natural gas and renewables, primarily wind and solar. The variability of these renewable resources will require standby generation availability, which will generally be met by natural gas facilities. It is unclear what the balance this summer will be between the increasing production and the increasing demand. Add to that the uncertainty of refilling storage, and the result is a growing consensus that prices will remain higher than originally projected for 2014. The first graph below shows some recent analyst projections.

These projections created a good news/bad news scenario. Since the first four months of 2014 averaged $4.85, due to the unusually cold winter, the balance of the year must average $4.37 in order to meet the consensus average. The bad news for gas consumers is that these projections, if they turn out to be accurate, will mean a year-over-year increase in gas costs of 23%. The average NYMEX monthly settlement price for 2013 was $3.65 per MMbtu, $.84 lower than the consensus for 2014.

The key factor in pricing for this summer and for the balance of the year will be weather. The most recent National Weather Service forecast for the Jun-August period is predicting a hotter than normal summer in the West, South and Northeast. If this occurs, electric generation load may become a significant factor, creating the possibility that a slower than expected storage refill will cause these analysts to upwardly revise their projections again. The widespread belief that the shale revolution will provide abundant supplies at low prices will likely be tested over the next few months to see if the growing production will be sufficient to meet the expanding summer demand and refill storage, particularly in the face of lagging infrastructure to move supplies from some of the new production areas.

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By Ed Freeman

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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

Find out more about how your energy is produced and delivered to your business.

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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