The U.S. natural gas market enters winter this year in a delicate balance: production is at an all-time high and growing fast, but gas storage inventories are well below year-ago levels and the five-year average — and at an all-time low relative to consumption. If winter weather is normal or mild, the U.S. gas market will likely begin to settle into a period of sub-$3/MMBtu prices. But this year’s low inventory level means that colder-than-typical weather this winter could spell more gas price upside than the market has seen in many years. Today, we continue our review of the current gas market with a look at the relationship between gas- and coal-fired generation, and at how the combination of low gas storage inventories and low coal stockpiles might play out this winter.
Entering the winter (before forecasts turned cold), our NATGAS Billboard called for an end-of-March underground gas storage inventory level of about 1,250 Bcf (or 1.25 Tcf). As we covered in Part 1 of this series, even a moderately colder winter can add 400 Bcf of residential and commercial heating demand, and the upside to industrial demand could add another 100 Bcf. But a colder-than-normal winter also adds demand in the power sector, more so now that increasing numbers of people are heating their houses with electricity, particularly in the South. We estimate that a moderately cold winter would add about 200 Bcf to gas demand for power generation, all other things being equal.
While U.S. gas production is steadily growing, the time required to add additional drilling rigs, or even to complete a backlogged well, means that any production response during the winter would be minimal. Indeed, unusually cold winter weather often leads to lower production, due to well freeze-offs that remove supply from the market, at least temporarily.
So, under the cold-winter scenario we laid out just above, that’s (conservatively) 700 Bcf of potential demand upside, with little-to-no incremental production response coming in time. What could balance the gas market in a chillier-than-average winter? And how high would gas prices need to go to sufficiently rein in demand? In today’s blog, we look at the first of two likely possibilities — gas-coal competition. We’ll consider the other — LNG exports — in the final blog of this series.