Production Data Points to Record Rebuild for Natural Gas Storage
Copyright © 2008 Energy Intelligence Group, Inc.
Monday, May 12, 2008
With US gas inventories exiting a drawn-out winter at an unexpectedly low 1,230 billion cubic feet -- just below the five-year average -- bulls have had a strong fundamental to underpin the recent gas rally.
But the real math shows that the US could be headed for record gas inventories by the end of this refill season.
"Currently, the price of gas isn't highly correlated to how much or how little of it there is in tucked away underground, but it is influenced by changes in the direction of deficit and surplus to its year ago and seasonally average levels," a gas trader in Texas said. "Right now, gas production is at record highs. Hurricane season and summer demand is always the wild card, but even some conservative estimates show that we finish with storage between 3.6 and 3.7 trillion cubic feet going into the winter."
According to recent data released by the US Energy Information Administration, US gross natural gas production in February rose more than 1.6% from January and more than 10% from the same year-ago month.
In its latest monthly natural gas production report, the EIA noted wet gas output in the lower 48 states climbed to 61.28 Bcf/day in February, up nearly 1 Bcf/day from January levels and nearly 6 Bcf/day higher than in February 2007.
The data presented by the EIA are gross estimates and are the basis for calculating marketed production after subtracting gas used for repressuring, quantities vented and flared, and nonhydrocarbon gases removed during processing.
The EIA also noted that all areas reported increases for February; however, Texas accounted for almost half of the year-on-year gain due to strong output from the Barnett Shale play.
The monthly increase continued a 13-month upward trend in domestic production resulting from strong, successful drilling.
The EIA estimated that marketed production of US natural gas in 2008 would be up 1.6 Bcf per day, or 2.9%, but some industry analysts expect the increase to be much larger, as strong gains from the deepwater Gulf wells and unconventional plays keep output surging, which points to a very robust storage refill.
In 2007, the average daily US gas consumption from April to October was 54.7 Bcf.
Even if demand increased a very strong 2.3% year-over-year, that equates to a daily average demand of about 56 Bcf/d through October.
Even factoring in falling Canadian supply and anemic LNG imports, the real US supply picture is an average of about 67.9 Bcf/day. Compared to last summer's 54.7 Bcf/day, this implies an excess of 11.7 Bcf/day in gas supply, which over the April-October refill season could bolster storage by 2,500 Bcf. And if this gas does show up, it would push inventories to 3,740 Bcf, marking a record high refill.
"Part of the reason storage projections are looking so healthy is because production is growing at such a historic, rapid pace, it truly boggles the mind," said Rusty Braziel of Bentek Energy. "Isn't it ironic that you have two groups of folks that implemented plans to solve our gas supply needs several years ago in shale plays and LNG facilities, and now they're all coming online right on top of each other."
Additionally, some traders suggest that this year's gas supply could be bolstered even more as snowpack available for Northwest hydroelectric plants is at its best in nearly a decade, and could supplant natural gas-fired generation in the region by as much as 1 Bcf/d.
Other industry professionals also note a potential loss of 1 Bcf/d to 2 Bcf/d in industrial demand, particularly in the chemical industry, due to price-induced demand destruction and a global economic downturn (NGW May5,p1).
Finally, current forecasts favor normal cooling demand and routine hurricane outages.
"With storage building at such a rapid pace, it's not hard to think gas is due for a softening into the $7 to $8 range at some point. But even a faster-than-expected rebuilding of storage may not be able to overcome the psychology of $125 oil and expectations for a hot, hurricane-laden summer," another trader said.
"The gas market hasn't been trading on real supply and demand fundamentals for many months now. So even if we do get to another record storage refill this year, if the market is still being controlled by long hedge funds and speculators, it might not be reflected in the price of gas. But you have to think that the fundamentals will matter eventually."
Alan Lammey, Houston
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It would be interesting to see this guy's actual calcs for how he got to his "the real US supply picture is an average of about 67.9 Bcf/day" statement. This business does not lend itself very kindly to extrapolations, so if he is assuming that the 10% Y-O-Y increase in US production in February over the prior year will hold up over the whole year, he is making a risky assumption IMO.
I'm pretty sure that a fill of 2.5 TCF would break the record for largest fill, by a fairly healthy margin I believe.
The question is, with all this "wall of gas" (wrong metaphor, but can someone suggest a better one?) coming at us, why have the last several injections plus the estimate for Thursday, been more or less in line with the 5 year average, even adjusting for Indy Hub?
Would be interested to hear your and other natty bears' thoughts on this piece. |
