As winter makes its exit, and with it peak demand for heating, the nation’s natural gas storage inventories are higher than they were this time last year, despite 2015’s late start to spring temperatures.
And as the industry prepares to restock inventories during the so-called injection season between April and October, robust production will keep the natural gas market oversupplied and prices low, analysts said.
Natural gas in storage clocked in at 1.48 trillion cubic feet on March 20, according to the U.S. Energy Information Administration, representing “the first positive net injection this year.”
Storage levels are 63.6 percent above this time last year but 11.6 percent below the five-year average, according to the EIA.
Meanwhile, natural gas production, driven by fracking in shale plays, posted a year-to-date high of 73.2 billion cubic feet per day on March 22.
“This was largely because of record Northeast production, which hit an all-time high of 19.9 Bcf/d,” said the EIA, citing data from Colorado analytics firm Bentek Energy.
Production is expected to grow this year despite a falling rig count and plummeting oil and gas prices.
“We’re seeing an average 5.5 Bcf per day increase in production over last year,” said Erica Bowman, vice president of research and policy analysis for Washington, D.C.-based trade group America’s Natural Gas Alliance.
“That’s the story right now. It was a very cold February, but production is so strong it’s keeping storage up.”
Houston-based oilfield service company Baker Hughes on Friday put the U.S. rig count at 1,048 rigs after shedding 761 rigs over the last 12 months. The number of rigs targeting natural gas was 233, down 85 compared to the same time last year. In the Marcellus Shale play, 70 rigs were operating as of Friday, down compared to 76 a year ago.
“The problem is that, unlike 20 years ago when production was regularly throttled back to avoid overwhelming the market during the low-demand summer months, there is little sign that producers are backing off supply ahead of this year’s injection season,” said Teri Viswanath, director of commodity strategy, natural gas for financial services firm BNP Paribas.
For one thing, more efficient drilling means producers can get more gas out of a well than they could years ago. Another factor is a backlog of wells that have been drilled, but not yet completed, she noted.
“According to our analysis, most major shale plays are currently carrying a three- to six-month well completion backlog,” Ms. Viswanath wrote in an analyst report. “Consequently, we now expect that domestic production will increase by 3.77 Bcf/d over year-ago levels as these wells are brought online over the course of the year.”
Meanwhile, storage facilities may be strained this summer as more gas floods the market and prices stay low. But that means other sectors of the market could take advantage of depressed prices.
“We now expect that a more significant price-induced demand growth will be required to offset supply,” Ms. Viswanath said.
Electric generation opportunity
The biggest source of demand for the fuel is going to come from the power sector, said Bob Yu, senior energy analyst for Bentek.
“In the summer, there’s not really any heating demand, so the main source comes from storage injections and power burn,” Mr. Yu said. “If production keeps at 73-Bcf/d levels, we’re expecting record levels of power burn.”
More power plants are expected to switch from coal to natural gas or retire, putting the spotlight on natural gas. That’s partly due to stricter federal regulations on emissions. Bentek expects about 13,000 megawatts will be removed through coal retirements this year. The other factor is natural gas prices are expected to stay low, making it competitive against coal.
“It’s kind of a perfect storm,” Mr. Yu said.
Consumption of natural gas for electric power generation in 2015 hit record levels earlier this year and has remained elevated through March, according to an EIA report citing Bentek data, averaging 22.7 billion cubic feet per day from Jan. 1 through March 25.
“The increase in power burn has largely been the result of two factors: low natural gas prices and cold weather,” according to EIA.
Ms. Bowman noted that while power plants are poised to consume excess supply, more sources of demand will be needed to make a dent in the market.
“There are [liquefied natural gas] exports and petrochemical plants, but those are still some time out, so it’s in a holding pattern where we have significant production struggling to find a home,” Ms. Bowman said.
“Going forward there is a concern about demand, but it’s also a great opportunity for the states that produce the gas and the states that consume it.”
Stephanie Ritenbaugh: email@example.com or 412-263-4910.