Title: Natural gas at $2.50 significant for coal; small storage build

Contributor Kyle Cooper breaks down the most significant developments in last week’s natural gas market.

Price Action:   Prices marched higher at an accelerated pace, rising 23.0 cents (10.1%) to $2.509 on a 25.8 cent range.

Price Outlook: The recent advance to the $2.50 area is considered significant. The price relationship between coal and natural gas will be crucial to the pace of injections throughout the 2012 injection season and the ability of the market to maintain the recent price advances. The temperature adjusted supply/demand balance will be watched very closely to determine whether coal is regaining lost power market share. CFTC data indicated another rise in the net long speculative position with the largest position since June 2011. CME futures open interest increased with total open interest across the complex rising above 5.9 million contracts on May 8, 2012.

Weekly Storage: US working gas storage rose 30 BCF for the week ending May 4. Current inventory levels of 2,606 BCF now rise 779 BCF (42.6%) above last year while surpassing the 5 year average by 804 BCF (44.6%). This week’s storage again was the smallest on record for the corresponding reference week. Canadian storage levels are also considered bearish with inventories already at 71% of overall capacity. Western Canadian storage facilities are at 81% capacity.

Storage Outlook:  After peaking at 893 BCF on March 30, the storage surplus is now down to 779 BCF. Our current forecast is that the storage surplus will be under 700 BCF by mid-May. It is considered extremely unlikely that a +100 BCF injection will occur in 2012 and even a +90 BCF build may only occur during holiday influenced weeks. While the current S&D balance does not portend storage capacity constraints, a record storage level is still forecast in October or November.  See graph below.

Supply Trends: Total supply fell 0.1 BCF/D to 67.9 BCF/D. Lower US production offset a slight Canadian import increase. LNG and Mexican exports were unchanged. The US Baker Hughes total rig count rose as again increased oil activity more than offset the natural gas decrease. The Canadian drop resulted in an overall slowdown in the total North American rig count. The total North American rig count of 2,094 still stands 137 higher than last year. The higher efficiency horizontal rig count surged 29 to a new record of 1,187, 146 higher YOY.

Demand Trends: Total demand fell 1.5 BCF/D to 61.5 BCF/D as lower R&C and industrial demand outweighed increased power demand. Electricity demand rose 5,299 gigawatt-hrs to 74,130 which is 6,595 (9.8%) above last year and 4,260 (6.1%) over the 5 year average. Temperatures across the country have moderated and the next few weeks will likely be the largest storage injections of the 2012 injection season. The pace of April injections has been the slowest since 2000. Many sources have attributed the low injections to warmer temperatures and higher electric power demand. In fact, warmer April temperatures are bearish and total electricity demand was below both last year and the 5 year average. Rather the primary driver of low injections remains economically driven electric generation displacing coal units.

Other Factors: Equity markets fell again as numerous worries weighed on the market including a large derivative related loss at JP Morgan.

Each business day RBN Energy posts a Blog or Markets entry covering some aspect of energy market behavior. Receive the morning RBN Energy email by simply providing your email address – click here.