Natural Gas Market Indicators

Prices – the first two months of the Atlantic and Gulf of Mexico hurricane season have been uneventful. Does this mean that we are out of the woods regarding weather- induced supply disruptions or corresponding price run-ups – of course not. However, look at the record. Gulf production facilities offshore have demonstrated that they can weather a major storm and remain relatively intact. Even onshore facilities have demonstrated some resiliency under extreme conditions. Current underground storage inventories are high, as are cumulative LNG imports. Even if there is a late season weather event can we observe that perhaps, “there is nothing to fear but fear itself.” Maybe. The facts are that the short-term supply picture is strong and downward pressure on natural gas prices pushed both Henry Hub spot and near-month futures to below $6.00 per MMBtu by July 23. Weather – that is, heat and its geographic location – resulting cooling load requirements and the possibility of lingering tropical storm activity may dictate the path of natural gas prices for the balance of the summer, remembering that last year included a short-lived price collapse in September when storage inventories were high and supply disruptions were no longer an issue. 

Weather – the cooling season is now measured to be cumulatively 3.2 percent warmer than normal after two straight weeks of cooler than normal conditions ending July 28. Six of the last nine weeks have been warmer than normal nationally, according to data from the National Oceanographic and Atmospheric Administration. On a cumulative basis, only the West South Central census region has been colder than normal this summer. New England and the Mountain region have all been cumulatively 18 percent warmer or more to date.

Working Gas in Underground Storage – for the weeks ending July 21, 2006 and August 4, 2006 national underground storage activity actually resulted in net withdrawals, primarily due to power generation requirements met by natural gas. That unusual storage pattern has not materialized to date in 2007. For the week ending July 20, 2007 underground storage took another step up as net injections totaled 71 Bcf, raising current underground storage inventories to 2,763 Bcf, which is 16.1 percent above the five-year average and has pushed this year’s working gas inventory ahead of the same at this time last year.

Natural Gas Production – natural gas production before extraction losses has remained essentially flat since late May averaging 51.7 Bcf per day in June and 51.6 Bcf per day during July, according to Bentek Energy LLC.

Rig Counts – many analysts believe that improved rig efficiency and a concentration of drilling efforts in shales and coal seams onshore mean that less growth in rig counts can support domestic production for a longer period than a decade ago. In fact, rigs operating have been above 1,700 for twenty-six straight weeks (since the week ending February 2, 2007), according to Baker-Hughes, and have reached as high as 1,790. The current count of 1,775 is 61 total rigs more than this time last year. The 1,474 gas-directed rigs currently operating are 66 more than one year ago and represent 83 percent of current drilling activity in the U.S.

Pipeline Imports and Exports – pipeline exports to the U.S. from Canada were about 8.1 Bcf per day in May 2007; however, they strengthened to 8.7 Bcf per day in June and have been even stronger in July at 8.9 Bcf per day. For Mexico, pipeline imports of natural gas from the U.S. have been 1.0 Bcf per day or greater for 11 of the past fourteen days.

LNG Markets – after hibernating for nearly half of the year, Asian and northern European markets for spot LNG cargoes awakened this month. This may slow the record pace of LNG imports at U.S. facilities so far this year, where LNG imports for June and July averaged 3.0 Bcf per day.  In Asia, the LNG awakening was driven mainly by nuclear outages experienced by Tokyo Electric.  Tokyo Electric utility representatives have stated that an additional 10 to 15 spot cargoes of LNG may be needed through the end of September 2007 to cover the nuclear capacity shortfall.  In Europe, with natural gas trading at near parity or higher than Henry Hub prices, the westward flow of spot LNG cargoes have slowed dramatically.  Consequently, the Isle of Grain regasification terminal in the UK received a spot cargo on July 19th, the first cargo since March 2007.  On July 23, August through October natural gas futures contracts at the National Balancing Point in the UK were averaging $6.36 per MMBtu as compared to $6.15 per MMBtu at the Henry Hub.  

Natural Gas Consumption – natural gas to power generation has peaked at over 31 Bcf per day during July and has been sustained for a period of days at about 29 Bcf during the month. Even though this is about 34 percent higher than the average to power generation in June (21.7 Bcf per day), volumes of natural gas to storage have been solid, actually surpassing inventories measured at this time last year. Overall, consumption by end-users (including exports to Mexico) has average about 50.1 Bcf per day in July compared to 48.1 in June 2007. That is only a 4.2 percent increase and points to a relatively calm summer to date in terms of managing natural gas to meet incremental power generation requirements.

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