High natural-gas supply keeps growing
Updated: July 2, 2012, 8:48 AM
buffalonews.com
Natural-gas production in the U.S. is almost overwhelming the nation's storage depots, threatening a drop in prices after the fuel outperformed every other commodity in the second quarter.
Output, already at unprecedented levels in 2011, will rise a further 3.4 percent this year as companies use hydraulic fracturing, or fracking, to free gas in shale formations, according to the Energy Department. Production from the Marcellus Shale in the U.S. Northeast doubled in April, when prices dropped below $2 per million British thermal units for the first time in a decade.
Gas this week approached $3 as power plants bought the fuel in place of costlier coal. Demand still hasn't been strong enough to keep supplies from topping 3 trillion cubic feet, a record for this time of year. Some pipeline companies have warned producers not to ship gas in excess of contracted amounts, a situation that normally doesn't occur until September, according to federal regulators.
"By the end of summer, when storage is close to being maxed out, we could make another run close to $2," said Stephen Schork, president of Schork Group Inc., a consulting firm in Villanova, Pa. "There is too much supply and not enough demand."
Natural gas has risen 31 percent this quarter, the first increase since the final three months of 2010. The fuel was the biggest gainer in the Standard & Poor's GSCI spot commodity index after being the worst performer in the first quarter, when the warmest winter since 2000 cut demand.
Gas for August delivery rose 3.9 cents, or 1.4 percent, to $2.761 per million British thermal units as of Friday afternoon on the New York Mercantile Exchange. Prices have gained 45 percent since dropping to $1.902 on April 19, the lowest intraday price since January 2002. Gas has fallen 7.6 percent this year.
U.S. inventories totaled 3.063 trillion cubic feet
in the week ended June 22, 75 percent of estimated capacity and 25 percent above the five-year average for the week, an Energy Department report showed last week. Stockpiles last year, which rose to a record 3.852 trillion cubic feet in November, didn't surpass 3 trillion until Sept. 2. Peak capacity in the lower 48 states is 4.103 trillion cubic feet, according to the department.
More pipeline operators may tell gas producers to limit how much fuel they send on their systems as storage sites fill up or risk penalties, said Christopher Ellsworth, chief of the fuels market analysis branch in the Federal Energy Regulatory Commission's enforcement office in Washington, who didn't name specific companies. Penalties can range from a few cents to $20 per million Btu, or pipelines can confiscate the gas, he said.
Excess inventories can create regional supply bottlenecks, similar to how city traffic jams can create congestion extending for miles, Anthony Yuen, a strategist at Citigroup Inc. in New York, said in a June 27 interview.
Prices rose during the quarter as demand from electricity generators increased 30 percent from a year earlier, helping the stockpile surplus narrow each week since the end of March, Energy Department estimates show.
The economics of switching from coal may be disappearing at current gas prices, Michael Zenker, head of commodities research at Barclays Capital in New York, said June 25.
"To get rid of the storage surplus, we calculated prices would have to stay at $2.50 for the rest of the summer," he said. "That's our magic number. When we rally back into the $2.60 and $2.70 range, we think we lose enough demand that it starts to be a self-correcting downward price phenomenon."
Zenker says stockpiles will probably rise to 4.15 trillion cubic feet this fall, before supplies begin to decline as cold weather sends demand to an annual peak in the winter.
The pace of fuel switching may slow during the summer as demand for electricity to run air conditioners prompts generators to boost their use of coal-fired plants. Coal demand will rise 29 percent next quarter from the current three months, according to the Energy Department.
A move back to coal by power plants will cause weekly gas injections to storage to exceed average levels "and will certainly result in inventories hitting maximum capacity well earlier than normal," Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a June 27 note to clients.
Marketed gas production will average 68.47 billion cubic feet a day this year, up from a record 66.22 billion in 2011, the Energy Department said in its monthly Short-Term Energy Outlook on June 12.The gas-rig count has fallen by a third this year to 541 as of June 22, the lowest count since August 1999, according to data released June 22 by Baker Hughes Inc. in Houston.
The declines in production seen so far are "very marginal," Laurent Key, an analyst with Societe Generale in New York, said in a June 25 interview. Low output from the Haynesville shale formation in Louisiana is offset by higher Marcellus shale output in the Northeast and gas produced as a byproduct of oil and other liquids, he said.
This quarter's rally hasn't left prices high enough for some energy companies.
Rex Tillerson, chairman and chief executive officer of Exxon Mobil Corp., the largest U.S. gas producer, said current gas prices are not sustainable.
"We are all losing our shirts today," Tillerson said June 27 at the Council on Foreign Relations in New York. "The cost of supply is not $2.50." |
