Natural gas pricing for the upcoming year

I am going to predict that pricing for natural gas for the next 12 months will be higher than the previous 12. I base this upon how low the natural gas storage levels are right now. This is obviously very good for the industry and landowners whose property is in production.

From the EIA:

There are currently 22 more weeks in the injection season, which traditionally occurs April 1 through October 31, although in many years injections continue into November.  EIA forecasts that the end-of-October working natural gas inventory level will be 3,405 Bcf, which, as of May 30, would require an average injection of 87 Bcf per week through the end of October. EIA's forecast for the end-of-October inventory levels are below the 5-year (2009-13) average value of 3,837 Bcf. To reach the 5-year average, average weekly injections through the end of October would need to be 106 Bcf.

The weekly natural gas storage report can be found here: http://ir.eia.gov/ngs/ngs.html

 

Does anyone have other insights?

 

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Permalink Reply by jerry lee nichols on June 13, 2014 at 3:34am

also consider the fact that a predicted strong EL Nino effect will make for a warmer winter in the northern US this coming year. If this occurs the spot markets will be rather soft pricewise.

Permalink Reply by Jack Straw on June 14, 2014 at 6:34pm

RE: "a predicted strong EL Nino effect will make for a warmer winter in the northern US this coming year"

There seems to be no firm consensus is this regard.

Predictions that I have been reading (from trusted sources) have called for a weak El Nino effect and a colder than average winter over much of the NG consuming USA.

A full (detailed) article can be found here:

http://theweathercentre.blogspot.com/2014/06/preliminary-2014-2015-...

An excerpt:

What Can We Expect This Winter?

 

It's too early to make maps for this upcoming winter, but we have an abundance of hints we can use for some early forecasting. Predictions for temperature and precipitation will be given. Anomalies in confidence will be listed; if no confidence level is listed, confidence is average.

 

For the Pacific Northwest: A warmer than normal winter with around average precipitation is currently favored, due to the state of the Pacific Ocean and choice analog year. Snowfall is projected to be slightly above normal.

 

For the Southwest: A warmer than normal winter with above average precipitation is currently favored, due to expected high pressure along the West Coast and an enhanced subtropical jet stream. Snowfall is projected to be around average.

 

For the North Plains: A cooler than normal winter with average precipitation is currently favored, due to the expected Pacific set-up and choice analog years. Snowfall is projected to be around average.

 

For the South Plains: A cooler than normal winter with slightly below average precipitation is currently favored. Snowfall is projected to be slightly above average.

 

For the Midwest and Great Lakes: A slightly cooler than normal winter with around average precipitation is currently favored. Low confidence. Snowfall is projected to be below normal.
For the Ohio Valley: A slightly cooler than normal winter with slightly below average precipitation is currently favored. Snowfall is projected to be slightly below normal.

 

For the Southeast: A cooler than normal winter with wetter than normal precipitation is currently favored. Higher than normal confidence. Snowfall is projected to be above normal.

 

For the Mid-Atlantic: A cooler than normal winter with above average precipitation is currently favored. Snowfall is projected to be above normal.
For the Northeast: A cooler than normal winter with above average precipitation is currently favored. Snowfall is projected to be above normal.

In addition to the above Joe Bastardi (currently with WeatherBell) has made a similar prediction.

JS

Permalink Reply by Joe Shervinski on June 15, 2014 at 7:32am

I'm a bit perplexed at the belief a bad winter means high gas prices, at least from a commodity perspective. The peaks in the market came during the summer and the low points are most often Jan/Feb. Maybe there is lag like sometimes in the stock which brought about the saying "Buy the rumor, sell the news" Haha......Certainly as we have seen, the "real" price paid to royalty owners has little to do with futures pricing at times.  But without an uptrending market, can nat gas hub prices climb into cold weather, as reflected in royalty payments? Just trying to get an understanding for the relationship between weather predicting and nat gas pricepredicting.

Permalink Reply by Jack Straw on June 15, 2014 at 2:43pm

Injection season runs from mid-April to mid-November.

Withdrawal season runs from mid-November to mid April.

 

Utilities, as regulated monopolies, are required to fill storage prior to the start of withdrawal season; if, by mid-summer, the supply situation is such that there is a need to bid higher prices to accomplish this …. Higher prices it is.

 

By January/February we are mid-way through the withdrawal season; we know what the current storage situation is …. and we have an idea as to the near term weather forecast … and if we comfortable with the storage situation, there is no need to purchase additional  … Lower prices it is.

 

Below is a plot that I have borrowed from a respected internet colleague who goes by the moniker ‘Pothole Dodger’.  You will need to click on the below image to obtain the full plot ...sorry that is the best I can do!!!

             

In 2011, the peak (Henry Hub spot market) was in June (2200 BCF), the low was in November (3850 BCF).

In 2012, the peak was in November (3900 BCF), the low was in April (2550 BCF).

In 2013, there were two (nearly equal) peaks one in April (1700 BCF) and one in December (3250 BCF); the low was in January (3200 BCF).

For 2014, I think that it is safe to guess that the peak will be February/March.

 

The peak is determined by weather and the amount of gas that is in storage.

The low is determined by the weather and the amount of gas that is in storage.

 

Looking at Pothole Dodger’s plot …. It is difficult to use past behavior to predict future spot prices …. not unless we have a crystal ball that is able predict (accurately) future weather (including exceptionally cold weather that results in ‘freeze-offs’ of wells).   

 

RE: “I'm a bit perplexed at the belief a bad winter means high gas prices, at least from a commodity perspective.”

 

I invite you to look at the spot prices in February/March of this year …. Did you spend the winter of 2013/2014 in Arizona? …. If you spent it in much of the USA, you would have to say that the winter of 2013/2014 was a ‘bad winter’ …. A bad winter that correlated with high gas prices; spot prices almost twice as high as current prices.

 

With Real Estate, it is ‘Location, Location. Location’.

With natural Gas, it is ‘Weather, Weather, Weather’.

 

OBTW, it is not just a cold winter (HDD, heating degree days) which affect prices; also, a hot humid summer (CDD, cooling degree days) which can have a positive effect upon NG spot prices …… a hot humid summer can make it difficult to fill storage.  

 

Admittedly, shale gas has made it more difficult to predict future prices; we will just have to wait and watch (or is that ‘watch and wait’).

 

ALL IMHO,

                      JS

Permalink Reply by Jack Straw on June 14, 2014 at 7:19pm

David,

           RE: "The EIA now talks about NG power burn, Electricity generation from NG."

The transition from Coal to NG for electrical generation will continue ... that would seem to be baked into the cake ... about 1/2 of the additional production observed appears to currently be absorbed by additional demand ... NG electrical generation likely a substantial portion of that demand.

Several PA Coal powered power are currently being shut ... but the velocity of closings seems to be rather constant ... I do not see an acceleration.

And, so long as coal is cheap relative to NG ... they will push existing coal plants to supply as much base load as possible. 

RE: "The amount of NG going towards this should go up when it gets hotter this summer."

The long range weather forecasts I have seen call for a warmer summer for the west; but a cooler summer for much (or most) of the NG consuming USA. The record/new record Great Lakes ice of the past winter has been slow to melt

Another factor that might skew my analysis is the wells waiting upon the infrastructure that will allow them to get their NG to market. Unknown to me is how many will make it into production this summer.... or how many will be throttled back, due to insufficient pipeline capacity or ethane rejection.

And, there is a 'Catch 22' situation ... the New England States need and want PA, OH and WV cheap NG; but lack the pipeline capacity necessary to deliver the NG. But those very New England State residents who need the NG seem to not want the pipelines required to deliver that NG .... and those new pipelines would necessarily need to cross the 'enemy territory' of the Peoples Republic of New York.

Midstream (pipeline) operators are reluctant to build or expand upon their pipelines without hard commitments as to committed supply from the operators ..... the O&G operators are reluctant to commit to supplying a certain amount of NG to end users (utilities) unless and until the know that there is sufficient pipeline capacity (or there are sufficient facilities available to strip out the wet in their wet gas such as to eliminate the specter of ethane rejection).

It should be noted that we both foresee the same likelihood of range bound prices for NG over the near term.

I hope that we are both right ... as relatively stable NG prices will encourage NG usage and allow for the commitments that will increase demand for NG (as supply is likely to continue its increase).

The past history of radical  price fluctuation has discouraged the transition to NG; no one wants to be the person who 'sells' NG to their senior management, only to see a price spike; a stable price would hopefully create a home for the projected increase in supply.

ALL IMHO,

                    JS

Permalink Reply by Philip Thackray on June 9, 2014 at 1:32am

Jack,

Further support of your calculations are Natural Gas (Henry Hub) Physical Futures Quotes above $4.60 through March 2015 (but never above $5 during that period).

Natural gas is back on the table.  The recent Range presentations describe the company as pursuing Super Wet, Wet and Dry Marcellus equally in their South West PA areas.

I'm in an XTO unit in S. Butler County, PA so I talk to XTO personnel frequently (part of the physical well facility is on my property).  A highly placed XTO guy recently told me that XTO was going to the Dry Utica areas of Eastern Monroe and Eastern Belmont Counties, Ohio big time.  I assume that other O&G companies see the same thing.

So the financial people see prices holding for a least the next 9 months and the O&G people are drilling natural gas only wells.

RBN Energy's daily blogs over the last year catalog the existing and new markets for wet and dry gas products, how the products will get to market and the economics associated with the markets and transportation means.  From what I see, demand is coming on strong but there could be oversupply periods through approximately 2016 - 2017 (C1, C3, C4 and perhaps condensate).

Unfortunately, even if the crackers come to fruition nobody sees a market for all the ethane (C2) any time in the future.  Over the last couple of years, O&G companies have included purity ethane sales in their presentations at quantities and sales prices that now look to have been greatly overstated.  RBN Energy calls the ethane market the "ethane asylum" LOL!

The O&G industry has a history of overextending thereby killing the commodity price and then retracting.  Then repeat.  But for the first time an entire demand market is erupting to make use of current and potential supply.  This looks to be different than any earlier cycle for that reason.

If the demand market fleshes out to the predicted extent this should expand the economic shale areas going into the future.  Some time in the future the "low hanging fruit" will be gone but the demand will have been established.

All of this seems good for the landowner, now and/or in the future.

YMMV!

Phil

 

 

 

 

Permalink Reply by Tim Tarr on June 9, 2014 at 1:00pm

Something else to consider is all the State, County, Township, City ... that will replace those Coal/Oil heating systems. Plus all the consumers that need new heating systems. Only ones that get to exempt themselves are the Feds. Electric is going to get more expensive so that's not a good solution.

Permalink Reply by Philip Thackray on June 10, 2014 at 12:07am

David,

Here is the "official" forward curve for CME NYMEX natural gas futures contracts for June 9, 2014.

The full article is available here .

Phil

Permalink Reply by David Perotto on June 10, 2014 at 1:10am

From the report:

To sum up for this episode, looking at June forward curves for CME NYMEX Henry Hub natural gas futures over the past 6 years provides a great snapshot of how the gas market has traded since 2009. The step change down in prices that resulted from the gas surplus in 2012 appears to be the new “normal” for gas now. Even the polar vortex winter of 2013/2014 and its heavy impact on storage levels has just created a temporary “blip” in prices with an anticipated return to lower levels in the forward curve next April. Meantime there has been a dramatic reduction in the size of the seasonal “humps” in forward curves.

Interesting trends...

Permalink Reply by Philip Thackray on June 10, 2014 at 1:24am

David,

It is also an interesting example of just how wrong these futures numbers can be!!

Phil

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Permalink Reply by Joe Shervinski on June 10, 2014 at 12:26pm

Not to create an argument with you David, but I see the nat gas market in a different light. I am purely a market technician and have been for 25 years for my self. I don't use supply/demand or any fundamentals. But I prefer to find cycles and other technical methods, along with Elliot Wave.

I believe at this point the tide has changed and we are headed lower for perhaps the next two years. The breach of over $6.00 did not have a follow through, so in the big scheme of things, this was a "corrective wave" and not an impulse wave up.

I understand it's in no one's interest here for lower prices including mine. But with my own research, I am basing my own decisions on this possibility and marketing my mineral rights to the highest bidder. I hope to accomplish this in the next few weeks.

There's no offense intended on your analysis and I personally appreciate it. However, I have trained myself to not consider fundamentals, more or less, lock me in a closet with a chart and a pencil and I'll see if there is anything I can find in a market. Nat gas seemed so strange from it's history and I thought there was no cyclical sense; no clues, but I think I found some keys and that would be the only reason I'm posting about it here. I see a continuation of a longer term bear market......unless there is soon a break through above $6.18, I'm holding to this prediction. Blessings

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