Natural Gas Storage

Production is Down: Less Gas Moving into Storage

Gas production that was moved into storage was respectable last month, but not as robust as seen in recent years. Last month we reported a 47% surplus above the 5-year average storage levels. This month, the DOE is reporting it has been reduced to a 35% surplus. While our stockpile levels remain above the 5-year average, this report may represent a negative trend which could continue for some time.

Natural Gas production is down. The number of drilling rigs has dropped significantly and now sits at a new record low. Just 82 rigs were producing gas last week, down from 140 during the same period last year and 274 rigs below the peak of 356 in late 2014. In addition to the reduction in production, we are experiencing an uptick in natural gas being used in electric generation; further restricting gas from moving into storage.

Our concern: If production remains low and more gas is diverted into power generation, we could see a significant loss in gas storage. This would signal a tightening in the supply-demand balance and possibly send prices further upward. This marks an important (and negative) change in gas prices.

Weather Forecast: Temperatures ArePredicted to be at or Above Normal this Summer

Regionally, June temperatures look to be cooler in Oklahoma and Texas, well above normal in the Pacific Northwest, and normal to above-normal in the remaining Continental U.S.

The summer months, June through August, are expected to bring well above average temperatures for the entire West Coast states and the New England states.

If temperatures become above normal for the summer, we will see higher electric demands due to increased air conditioning loads. These AC loads may cause natural gas generation to ramp up faster than expected, thus reducing our storage levels. Any marked storage decreases could send gas prices higher.

Energy Prices

Natural Gas PricesJump 17% since Last Month

In our last Energy Outlook, prices began to move up; surpassing the $2.00/MMBTU threshold. Since then, prices have started to spike to $2.45, an increase of 17%. This is the highest we’ve experienced since January 8th of this year. The drop in production, warm weather conditions for the summer, and the increase in exports to Mexico are all driving the prices up.

The first week of June has delivered 5 new intra-day trading highs going back to last spring. Front-month prices are up 23% in June (so far).

Bottom Line

Prices Have Jumped - We May Not See Prices Under $2.00 Again

Prices have spiked and the market conditions do not look favorable in the short-term. Driving the price increase is the large reduction in natural gas production and the warm weather forecast. With natural gas prices at historic lows for the first 5 months of 2016, producers began to shut down uneconomical production sites and slowed the drilling of new rigs. Supply decreased at the same time the demand for natural gas-fired electric generation increased.

Unless summer temperatures get cooler or producers decide to open up the rigs, prices are likely to continue their upward drive.

The good news is prices are still low relative to the past 5 years. The question is: How long are you going to wait and watch prices rise before deciding to lock in your winter 2017 prices rates?