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Heat Wave Can't Get You $8 Natural Gas in 2012

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By EconMatters

 

The Energy Department reported that natural gas in storage grew by 26 billion cubic feet to 3.189 trillion cubic feet for the week ended July 20. The inventory level was 15.8% above the five-year average of 2.754 trillion cubic feet, and 18% above last year's level.

 

Low natural gas prices in the U.S. this year has not only tanked the stocks of many gas-weighted producers, but also dragged down profits of U.S-based oilfield services companies as a result of reduced gas drilling activity (See Chart Below).  However, since hitting a 10-year low of below $2/mmbtu in April, Henry Hub benchmark prices has surged 69% hitting $3.214/mmbtu on Monday, July 30, the high of the year.

 

 

Source: EIA, July 18, 2012

 

 

The latest bullish sentiment is fueled mostly by forecasts for more unusual heat this summer to increase air conditioning use.  In addition, there's also an increase in usage/demand as lower natural gas prices have also attracted many utilities to switch from coal to natural gas for power generation.  According to the EIA, electricity generated using natural gas was roughly even with coal for the first time ever in April.  Historically, natural gas typically supplied just over 20% of the domestic electricity needs. 


These positive indicators have prompted at least one article at Forbes to predict $8.00/mcf natural gas by "the approaching winter"--that means another 160% rise in about four months.  

 

Well, EIA did raise its estimate for domestic natural gas consumption this year, expecting demand to climb 3.3 bcfd, or 4.9%, from 2011 to 69.91 bcf daily driven mainly by a 21% jump in utilities coal-to-gas switching for power generation in 2012, offsetting declines in residential and commercial use, primarily due to a weak U.S. economy.

      

 

 

 

Nevertheless, the problem is natural gas starts to lose its cost advantage to coal at around $2.40 to $2.50 per mmbtu.  So the current $3.20/mmbtu levels, if sustained, could take away one significant bullish swing factor in the natural gas fundamentals--demand from the power gen sector.  If that happens, it is very likely there could be another record storage level before "the approaching winter," let alone $8/mmbtu.


 

 

The natural-gas market this year is now outpacing even the returns in oil and copper (i.e. Every dog has its day).  However,our observation is that the NYMEX natural gas market a lot of times could be in a somewhat irrational "trend-trading" mode driven mostly by traders totally disregarding the fundamentals.  The current run-up seems to be in one of those "trend-trading" momentum, and likely will not last long after reality sets in.  For now, we see Henry Hub continue to hover within the $2-$3/mmbtu range in the next twelve months barring a super-sized hurricane knocking out production in the U.S. Gulf.      


Further Reading - Oil to Natural Gas Ratio Explodes to 52:1

 

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Wed, 08/01/2012 - 05:07 | Link to Comment northwind
northwind's picture

great take on nat gas at Casey research 7/31/12. they lay out all the reasons why nat gas will be stuck in/near the present range for a good bit. mainly that there are thousands of wells drilled now but capped due to low prices. if/as prices rise they can be put into production almost overnight and then the price settles back down and this is with out any new holes being drilled which is still happening. there really is many years of supply already on tap so to speak.

Wed, 08/01/2012 - 05:07 | Link to Comment northwind
northwind's picture

great take on nat gas at Casey research 7/31/12. they lay out all the reasons why nat gas will be stuck in/near the present range for a good bit. mainly that there are thousands of wells drilled now but capped due to low prices. if/as prices rise they can be put into production almost overnight and then the price settles back down and this is with out any new holes being drilled which is still happening. there really is many years of supply already on tap so to speak.

Wed, 08/01/2012 - 00:45 | Link to Comment Herkimer Jerkimer
Herkimer Jerkimer's picture

If we've got so f'ing much gas how come the price is going up?

I'm seeing how there are shutting down rigs, to decrease supply.

What a surprise, sucky-baby businessthieves rigging the system, so to speak.

These pricks came around door-to-door, selling contracts in Canada in the 00's, ginning up the potential rise in prices and locking everyone in, grandparents and such.

They KNEW fracking was coming, yet kept it quiet to ring the last of the profits out of their old technology.

Now they'll let the market shake out, buy up all the supply and screw us on the supply side.

Has anyone's natural gas to their home really went down? Of course not.

They's fucking us.

Because they can.

Herkimer Jerkimer

Tue, 07/31/2012 - 22:12 | Link to Comment max2205
max2205's picture

That was my best trade this decade

Tue, 07/31/2012 - 22:01 | Link to Comment philipat
philipat's picture

Why doesn't the US change over from oil and USE this abundant clean cheap energy?

I know it needs investment in infrastructure but IMHO that investment would have been better made than bailing out Bank of Countrywide Lynch etc. And it would have created jobs and represented a GENUINE stimulus.

Wed, 08/01/2012 - 08:52 | Link to Comment De minimus
De minimus's picture

Many fleets are already switching due to the advantages, which are numerous. The problem is that conversion is expensive and one must be able to refuel regularly. This would also be an excellent opportunity for consumers, if they can convert without extreme expenses being incurred. Alas, the home compression pumps are available at approximately $4000 per unit and therefore almost prohibitively expensive at this point.

The average air compressor is available at $100 and so you can see that there is a little "mark-up" going on with the cng equipment. The prices will come down when there is competition for that market and a real opportunity exists for these dollars, regardless of the warranty problems that conversion creates.

Wed, 08/01/2012 - 02:20 | Link to Comment Bloodstock
Bloodstock's picture

Most things that make sense to us is the opposite of what the glow-bull elite will do, as they continue to steal our wealth. There is no honor among thieves.

Wed, 08/01/2012 - 02:20 | Link to Comment Bloodstock
Bloodstock's picture

Most things that make sense to us is the opposite of what the glow-bull elite will do, as they continue to steal our wealth. There is no honor among thieves.

Tue, 07/31/2012 - 21:33 | Link to Comment gookempucky
gookempucky's picture

When you have 13 million empty houses and untold empty retail space = lots of non-demand = think about it.

Tue, 07/31/2012 - 21:14 | Link to Comment OldE_Ant
OldE_Ant's picture

I guess no-one noticed that they changed how they accounted for natural gas in storage sometime late last year or early this year.  I don't have a link handy but I'm sure someone will dig one up.  I remembered reading that the changes to storage would appear to inflate the natural gas storage numbers by AT LEAST 10-20%.  This was about the time that UNG filed to sell another few billion worth of UNG shares and I remembered thinking I should find a way to short natural gas.

Looks like the change in accounting has gotten everyone fooled and made for some great Oil/Gas opportunities out there to make merger/acquisition more palletable for the ever growing TBTF energy companies.

On a side note I noticed today the Oil/Gas companies being sold off BEFORE the price drop in OIL hit, as if someone had already made the decision, was telling their players to start selling puts on OIL/NG plays before the oil selling came through.

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