A Hunk a Hunk of Burning Gas – Will Natural Gas Power Demand Keep The Lid on Storage?

Today the Energy Information Administration (EIA) publishes weekly US natural gas storage numbers for the week ending July 6, 2012. Last week EIA reported 39 Bcf injections making the total storage 3,102 Bcf. The natural gas stockpile is now 602 Bcf higher than this time last year but the rate of storage injection has slowed as a result of increased demand for natural gas burn by power generators. In today’s blog we look at the supply demand picture to see what is driving higher natural gas burn by power generators and the implications for storage.

Supply

Data from the natural gas production cell model produced by our friends at Bentek this week (see chart below) shows that US total dry natural gas production is still close to yearly highs despite gas prices falling below $2/Mmbtu in mid April. After a drop in production at the end of June caused by shut-ins for Tropical Storm Debby, output has rebounded close to record levels. So much for the impact of the economically driven shut-ins announced earlier this year.

Demand

EIA data for the week ending June 27, 2012 indicates that total natural gas demand was up 13 percent over the same week last year and that natural gas consumption for power generation was up 28.5 percent over the same week last year. The high consumption has kept demand close to supply and reduced the need to inject as much surplus gas into storage. As it has all year therefore, natural gas power burn continues to single handedly  hold  down storage injections in the face of record dry gas production.

The natural gas power burn increase has been with us for several months now. On July 6 the EIA published preliminary power generation data for April 2012. For the first time since EIA began collecting the data, generation from natural gas-fired plants was virtually equal to generation from coal-fired plants in April, with each fuel providing 32 percent of total generation. It remains to be seen if these levels of natural gas power generation can be sustained over the summer.

What is Behind the Natural Gas Generation Burn?

As we explained in the Talkin Bout My Generation series (Part I) and (Part II) – an increase in natural gas burn for electric power generation primarily occurs in one of two situations during the summer months. The first is when higher temperatures cause gas fired Combined Cycle Gas Turbine (CCGT) generation plants to be dispatched by system operators to meet peak demand. Because peak demand occurs after baseload coal generation capacity is fully utilized, this CCGT gas generation is in addition to coal. The second situation is when gas generation plant fuel costs are lower than coal generation plant fuel costs, leading system operators to dispatch natural gas CCGT plants instead of baseload coal plants for economic reasons – a.k.a. coal to gas switching. We will look next at each of these situations in turn to discover which one is causing the current increase in natural gas power burn.

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