oildrillWith natural gas prices at historic lows, consumers are happy when they see their energy bills arriving in the mail. But natural gas producers, distributors and storage companies are not as cheerful, to say the least. Although the stabilization of the natural gas market cannot be accurately forecast due to ongoing volatility, opportunities exist to take advantage of the current natural gas market situation and/or reduce the impact of market fluctuations on your business. There are several domestic indicators that can help to make the picture clearer and understand whether, and how, the natural gas market will move in 2016.

1) US Storage, Production and Rig Count
The three easiest domestic natural gas price indicators to follow are rig count, production and US storage volumes. Using rig count as indicator can be misleading. Although US rig count has fallen by over 50% in the past 12 months, record setting production of 33 trillion cubic feet (Tcf) was recorded in 2015. This 33Tcf is 23% above production volume of 2010.

us nat gas production chart

In addition, last week’s EIA storage report highlighted the issues of the glut in the system, showing US storage at 2,536 billion cubic feet (Bcf). These numbers continue to break records and have been above the five-year average since November of 2015.

undergrougd gas storage chart

In the short-term, the weekly, bi-weekly and monthly EIA reports only result in minor “blips” in the trading price of natural gas. In order to get a clear future picture, these indicators have to be monitored on a long-term basis to access a true market trend.

Looking forward to this summer, the key item to keep an eye out for is a greater-than-average reduction in storage volumes, in conjunction with a sustained drop in production volumes, resulting in a return to the five-year storage average. These two potential drivers will signal the market is making progress in reducing the current natural gas supply glut. Be forewarned, these drivers will not have a large impact on the market price. Instead, they will only signal a stabilization in the market price of natural gas and create potential for slight increases.

2) Continued Conversion of Power Generation from Coal to Natural Gas
Over the past three decades, the US has steadily increased the proportion of natural gas while decreasing coal usage to generate electricity. Natural gas finally overtook coal in mid-2015.

power generation chart
Source:  American Enterprise Institute

Much of the recent uptick in the usage conversion by power plants has been driven by cheaper natural gas prices and EPA standards for cleaner power generation. These two factors are likely to remain the same in 2016, which in turn will continue to drive electricity generation from natural gas instead of coal.

Another key factor that will affect the natural gas market price is the speed at which utilities convert operations from coal to natural gas and supplant the remaining 28% market share of coal. The EIA recently forecast natural gas to gain an additional 1-2% market share over coal in 2016. However, their 2017 outlook was not as promising, they expect natural gas prices to rise and coal to gain back a small percentage of market share, resulting in a net 1% increase of natural gas share of electricity generation over the next two years.

However, if natural gas prices remain low in the long-term, the ongoing conversation around converting coal to natural gas has the potential further increase the volume of natural gas consumed by the power generation industry over the next five years. Based on 2014 EIA data, if natural gas captures a conservative 1% share per year, it would result in an additional 1,000Bcf consumed per year by 2020. Being that electric power generation is the #1 usage of natural gas, this resource shift could quickly
consume a large portion of our supply glut and further stabilize the US natural gas market.

Nat Gas Consumed chartSource: EIA

3) A Long, Hot Summer!
After another low-usage winter with above average temperatures, relief from the natural gas glut has faded away as winter comes to an end. As it stands, from a consumption standpoint, the market’s biggest hope moving forward is to have a long, hot summer in 2016. While that sounds nice if you are on a beach somewhere drinking a cold beverage, not all consumers would agree… especially if it means higher utility bills.

NOAA and The Weather Company have predicted a warmer than average spring after a record-setting, warm February. If these warmer than average temperatures carry over into summer, it could mean higher energy (including natural gas) consumption. Industry analysts agree that an average summer could create a demand for 4,150 Bcf of natural gas for electricity production, but a warmer than average summer could have the potential for 4,500+ Bcf. This would represent 7-15% growth in natural gas consumption for energy generation versus last summer when recent coal to natural gas conversions were also taken into account. In comparison to other indicators, the demand for natural gas for energy generation could have the largest and quickest impact on market prices in 2016. Here’s hoping the long-term forecast is on the mark.

Based on these factors (and assuming the long-term weather forecast is correct), we expect the price of natural gas to stabilize or increase slightly through 2016. The ongoing conversion of electricity generation to natural gas and the anticipated increased consumption linked to that conversion should work in tandem to help producers and distributors of natural gas. Other long-term factors, including LNG exports and continuing improvements in production in production efficiency, will be explored in future blogs. Keep checking back for more energy information.

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