switching

This past winter’s gas price spikes shined a bright light on the changing dynamics driving Eastern U.S. natural gas markets, especially the growth in gas-fired generation that is contributing to more frequent — and more severe — spikes in gas prices in the region on very cold days. There are other changes too. For one, gas is increasingly flowing from the Northeast to the Southeast as prodigious Marcellus/Utica production growth is pulled into higher-priced, higher-demand growth markets. In today’s blog, we conclude our series on ever-morphing gas markets on the U.S.’s “Right Coast” by examining how gas pipeline flows back East have changed on days besides the winter peaks, how much demand could be unlocked by forthcoming pipeline projects, and what that new demand will mean for flow and price patterns.

The worst of this winter’s cold has passed, but the impact of structural changes in U.S. power generation will be felt in natural gas markets for years to come. The generation mix has been changing rapidly in recent years, and the switch from coal to gas is happening at an even faster pace on the East Coast than in the country overall. This switch reflects both coal-plant retirements and ongoing competition between remaining coal plants and gas plants. But low-cost gas supplies in the Marcellus and Utica plays don’t always have ready access to the biggest consuming markets, and this winter, we saw how the increasing call on gas for Eastern power generation can stress the gas pipeline grid and cause price blowouts. Today, we continue a series on Eastern power generation and prices by untangling the sources and drivers of gas-fired generation growth in the region.

The coal to gas switching debate has been raging for months.  How much is happening?  How long will it last?  Could switching continue to increase?  Will the generators save the producers from themselves?  So far this year, that latter assertion seems to be the case.  Additions to natural gas power burn by electric generators have been about the only thing propping up natural gas prices. If the generators weren’t burning so much gas, the storage surplus would be through the roof.  Last week EIA announced that natural gas matched coal’s share of U.S. generation for the first time in April.  That’s a big deal. In today’s blog “Talkin bout My Generation – Coal to Gas Switching Part I” we uncover the drivers behind the shift to natural gas generation, and set the stage for a deep dive into the longer term implications for gas markets.

Yesterday natural gas NYMEX futures for July delivery closed at $2.421/MMbtu, down 2.5 cnts.  Given where half of our RBN readers thought the market was going at the end of March (see Split Decision), this is a pretty good number.  After bottoming out at $1.91/MMbtu, Natgas skyrocketed to $2.74 before drifting back into the mid-$2.40s for the past few days (See graph below).  Is this price a signal that we’ve dodged the bullet one more year?  That the odds of natural gas storage inventories hitting maximum capacity levels are increasingly unlikely?  Clearly we need to look at the Bentek supply/demand numbers once more to get a better understanding of what is going on.

Last week I attended the LDC Gas Forum Southeast in Atlanta.  One of the folks I met at the conference was a manager of fuels risk management for a Kentucky utility.  To protect the innocent, we’ll call him Joe Friday.

May natural gas futures closed out last week at $2.089/MMbtu, down 5.2 cnts. The Henry Hub ICE cash day-ahead index was back below $2, coming in at $1.9802, down 8 cnts.  Cash prices have now been hovering in the bottom-end of the $2 range for more than a month.  U.S storage inventories are up to 2,479 Bcf, 60.5% over the five year average.  Last year between the 2nd week of April and the beginning of storage withdrawals (during a hot summer with a lot of gas fired power generation), another 2,252 Bcf went into storage.  If that happens this year, it would mean that the storage balance would top out at 4,631 Bcf – unfortunate since EIA tells us that capacity is about 4,200 Bcf.   The implication is that storage inventories will max out capacity sometime in the early fall, basically hitting The Wall – with unknown consequences for natural gas markets.  We don’t need no education.  We need less gas or more demand.