3 Factors That Can Influence Natural Gas And Electricity Prices During The Spring of 2016
Posted by Alberto Rios on Apr 25, 2016
Typically, spring is a season of low electricity and natural gas demand as heating demands from the winter fades away and cooling demand tends to be low until it starts ramping up closer to the summer. This year though, there are several factors that could potentially buck the bearish trend that has been in play since 2014.
- 1. Declining natural gas production – Since Sep-14 the total number of oil and natural gas rigs started dropping; however, because of the increase in production efficiency the output kept increasing until a peak was recorded on Sep-15. The total number of rigs dropped from 1,913 (1,592 Oil/338 NG) on Sep-14 by 130%, to 443 (354 Oil/89 NG) as of April 8, 2016. The drop has been so significant that despite high drilling efficiency there are evident signs that production is tapering off. Moreover, the Energy Information Administration reported on April 11, 2016 that natural gas production in the seven key shale-drilling regions is expected to fall by 491 million cubic feet/day, or 1.1%, in May compared to April. Consequently, there has been defensive buying on this information.
- 2. Power Burn – The power sector has become the largest consumer of natural gas, above industrial, commercial and residential consumers. Power burn is higher over the summer, when electricity peaks to meet cooling demand. Nevertheless, natural gas consumption during the winter has increased as more generation has switched to natural gas. Much of the annual increase in power burn comes on the back of baseload growth in gas consumption from coal retirements which totaled approximately 15GW in 2015. According to Platt’s, another 6.8 GW of coal-fired power will be retired in 2016.
Power burn averaged about 25 Bcf/day during the 2015-2016 winter, almost 20% above last year’s average of 21.4 Bcf/day during the same period and well above the 18.8 Bcf/day average of the past five years (source: Bentek Energy).
In 2015 the average capacity factor of natural gas combined-cycle plants exceeded that of coal steam plants for the first time on record. Natural gas combined-cycle power plants are running at a much higher rates compared to recent history, while the capacity factor at coal steam power plants has declined. According to the Energy Information Administration (EIA), the capacity factor of the U.S. natural gas combined-cycle fleet averaged 56% in 2015, compared with 55% for coal steam power plants.
- 3.Summer weather forecasts projections – As we approach the summer months, traders will closely monitor extended forecasts to gauge the level of peak electricity demand. In the event of warmer than normal temperatures early in the season, it is likely that near term prices will test higher levels and return to the $2.50/MMBtu range. Moreover, the risk premium on summer On-Peak power heat rates has the potential of increasing when the market expects above average conditions.
After a very mild winter, natural gas inventories ended the heating season at 2,478 Bcf, exceeding the previous end-of-March record high by 5 Bcf, set in 2012, according to the EIA. Strong production and tepid heating demand this winter pushed the natural-gas market into oversupply. Moderate demand during the spring is not likely to significantly affect price action, so prices will be much more sensitive to any supply disruption or a demand shock ahead of the summer. At this time it is too early to tell how much of a dent power burn will make on supply, but it is still possible that supplies will remain healthy before the start of the next heating season. Nevertheless, the recent rally suggests that investors are betting that the current natural gas supply overhang could get burned sooner than previously expected. The key variable in the price equation is how much the market will tighten during the summer.
Topics: natural gas, NG, forecasting