Worlds Cheapest Natural Gas Market Could Be Facing A Shortage
Oct 31, 2018
A natural gas shortage in Canada is expected to last through the winter months, forcing gas users ranging from industrial forces to local governments to seek alternative fuel sources and strategies for slashing consumption and conserving the gas they have. The shortage stems from this month’s pipeline explosion near Prince George, British Columbia.
In the aftermath of the explosion, FortisBC, one of British Columbia's largest utilities, says that their supply of natural gas will be reduced by a whopping 50 to 80 percent throughout the coldest months of the year. This sudden squeeze will necessitate a lot of unforeseen expenditures on alternative fuel sources. This is a cost that will be passed directly onto consumers, affecting everything from the price of gas and heating to even the price of vegetables, among other subsequent price hikes.
Natural gas has service already been restored to the province in the wake of the October 9th disaster, and pipeline owner Enbridge says that it will have the section of the pipeline that ruptured back online by the middle of November. The National Energy Board, however, has mandated that Enbridge limit pressure in the ruptured line and a smaller line nearby will also remain running below capacity until the spring of next year. As a safety measure, pressure levels will be kept at 80 percent along the entire length of the damaged pipeline up to the United States border.
The shortage is occurring in what is one of the cheapest natural gas markets in the world. Canadian gas has been hit hard by competition from the United States and limited pipeline infrastructure, which has only been made worse by the Prince George explosion. After the announcement that FortisBC’s pipes would remain running under capacity through the winter, gas prices fell to a five-month low last week. This is all to say that the sticker shock will be all the more severe for industries turning from natural gas to alternative fuel sources to overcome the winter long shortage.
The biggest effect of the natural gas shortage will be felt by the Canadian industrial sector, which consumed about double the amount of natural gas used by residential and commercial users according to data gathered by the provincial government in 2016. FortisBC has also made it clear that their highest priorities are the residents, who need to keep their homes warm during the coldest months of the year.
The City of Vancouver, the largest city in the province of British Columbia, has imposed a strategy to cut down on natural gas usage, which includes halting work at its gas-guzzling asphalt plant and turning down the thermostats at all buildings occupied by city-staff, with the exception of public spaces and libraries.
One of industries most heavily impacted by natural gas shortages is the agricultural sector, which uses large volumes of natural gas to heat greenhouses as well as to supply carbon dioxide to feed plants. T
The majority of growers in BC have what is called an “interruptible plan” with FortisBC, which has them pay a discounted rate in exchange for the utility’s right to stop service in an emergency circumstance such as the pipeline explosion, or during cold snaps when natural gas is a priority for other customers who need to heat their homes and buildings. While for the time being natural gas service has been restored to the agricultural industry, some growers are reportedly considering skipping this growing season altogether due to what is sure to be an exceedingly expensive winter.
Meanwhile, FortisBC is doing its best to find other sources of natural gas to make up for their own decreased pipeline capacity, and has reached out to TransCanada to maximize output of the Southern Crossing pipeline, while also urging their customers to minimize consumption in whatever way possible.
Cold Snap Could Send Natural Gas To $5
Oct 30, 2018
The natural gas market is looking rather tight, even as U.S. production continues to set new records.
Inventories fell sharply last winter, leaving the country a little light on stocks heading into injection season. That did not concern the market much, with record-setting production expected to replenish depleted inventories.
However, the past six months has not led to surging stockpiles, and inventories replenished at a much slower rate than expected. We are about to enter the winter heating season with inventories at their lowest level in 15 years. For the week ending on October 19, the U.S. held 3,095 billion cubic feet (bcf) of natural gas in storage, or 606 bcf lower than at this point last year, and 624 bcf below the five-year average.
The reason for this is multifaceted, with seasonal weather playing a role, but also structural increases in demand. “Hot summer weather, LNG liquefaction demand, exports to Mexico, and the industrial sector have all mitigated the impact from a 8.7 bcf/d YoY production growth surge this summer,” Bank of America Merrill Lynch said in a recent note. Low inventories and potential deliverability risks led the investment bank to hike its price forecast for the first quarter of 2019 to $4 per MMBtu, up from a prior estimate of just $3.40/MMBtu.
Coal shutdowns have led to a lot of fuel switching. Moreover, new gas-fired power plants have opened up and continue to do so. The U.S. also became a sizable LNG exporter in 2016, and exports will continue to climb in the years ahead with more terminals coming online.
New pipeline interconnections with Mexico should also lead to more shipments from Texas to the U.S.’ southern neighbor.
Peak winter demand in the early 2000s stood at around 75 to 85 billion cubic feet per day (bcf/d), according to BofAML. That figure spiked to 100 bcf/d last winter, helping to explain the rapid decline in inventories. There was a cold snap in early January, but the winter on the whole was “near normal,” BofAML argues, making the steep fall in stocks all the more remarkable. In other words, demand is structurally much higher than it used to be; the sudden tightness is not just because of a seasonal anomaly.
But, as always, natural gas markets can be highly volatile, and very sensitive to extreme weather. A cold snap this upcoming winter could lead to a price spike, especially with the inventory buffer so low. “The Polar Vortex winter of 2013-2014 realized a record low salt inventory level of 54 bcf,” BofAML said. Salt inventories are those that can be called upon quickly. “Another Vortex, which on average has occurred once every 7 years in the 1950-2018 period, would be catastrophic,” Bank of America Merrill Lynch warned.
Unlike 2014, the last time we saw a polar vortex and a natural gas price spike, this time around there is a lot less coal to fall back on in the event that inventories plunge to low levels amid soaring demand. As a result, natural gas prices might be forced even higher. “A cold winter paired with higher coal prices and reduced gas-to-coal switching could propel NYMEX natural gas to a brief spike over $5.00/MMbtu,” BofAML said.
This does not negate the long-term bearish forecast for natural gas prices. The U.S. shale bonanza continues, both in the Marcellus and Utica shales in the northeast and the Permian basin in West Texas. “Past this winter, we expect production to overwhelm demand growth and lead to above-normal inventories by 2H19 and a risk of storage congestion in 2020. Our average price forecast for 2020 remains $2.55/MMbtu, reflecting bearish longer-term fundamentals,” BofAML concluded.
Still, in the short run, structurally higher demand and the prospect of another polar vortex, or merely below average temperatures this winter, could overwhelm what has been record natural gas production.
Can U.S. Gas Demand Keep Up With Surging Production?
Oct 27, 2018
Natural gas production hit another high in the United States at approximately 87 billion cubic feet per day (Bcf/d) over the last weekend. The rise in production contributed to a total gas supply over 91 Bcf/d before we even head into the winter months.
The surge in domestic natural gas production comes at the same moment as we are experiencing a shortage in storage going into the season with highest natural gas demand. Storage is vital during the winter months when demand for natural gas spikes and production is not able to keep up, causing the necessity to dip into reserves.
Currently storage is at a 10-year low, coming in below 3.2 trillion cubic feet of available storage capacity. What’s more, net imports of Canadian natural gas have been low thanks to Enbridge’s pipeline rupture near Prince George, British Columbia. When the import volumes return to their normal levels, total gas supplies in the U.S. would rise even higher, potentially exceeding 92 Bcf/d.
Most estimates for this week’s Energy Information Administration (EIA) weekly storage report project that there will be an injection in the low 50s Bcf, not nearly enough to make a dent in the persistent storage deficit.
A Reuters poll of 18 market participants showed a range of 39 Bcf to 65 Bcf, with a median build of 51 Bcf. At this time last year, the build was 63 Bcf, and the five-year average is 77 Bcf for the corresponding period, emphasizing the shortcomings of this week’s storage injection.
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Natural gas demand can’t be expected to spike in early November either, with a very mild forecast for the coming weeks. We can therefore continue to expect a relatively low heating demand nationwide, despite several cold snaps in the Midwest and Northeast. In the face of this news, natural gas futures have been falling accordingly. Nymex futures settled at $3.166 for November, down 4.6 cents on the day. December plummeted 5.6 cents, ending up at $3.227, and the winter strip (November through March) went down 5.4 cents to $3.174. That being said, weather model volatility and market uncertainty means that big price swings more than likely in the near future.
Meanwhile, despite depressed gas prices and major storage shortages, across the country production is natural gas production is ramping up.
Take the case of East Texas Haynesville, which has been experiencing a major renaissance thanks to a recent spike in investment from majors like ExxonMobil and BP, and is now at a record high, having skyrocketing at a breakneck speed, up approximately 55 percent since January. The up-and-coming field has shown ballooning initial production rates, high internal rates of return growing higher, and a major increase in overall production. They’ve reached approximately 9.9 Bcf/d currently, up from 6.1 Bcf/d just two years ago, according to data from S&P Global Platts Analytics.
In fact, East Texas counties including Shelby, San Augustine and Nacogdoches have seen global majors ExxonMobil and BP double their rig count in the area just within the last year, making the region more competitive with established fields in neighboring Louisiana. In October the East Texas rig count reached 21, as compared to just 12 rigs at this time last year.
Despite major drawbacks like unpredictable weather patterns,volatile gas prices, and storage capacity grinding by at a 10 year low, major investors are continuing to pour money into natural gas production. With so many factors of unpredictability going into the winter season, it looks like the only thing we can expect for natural gas futures is a wild ride.
China’s Natural Gas Market
China’s natural gas production has been rising in recent months, but the growth rate hasn’t been even close to meeting the booming demand due to the cleaner-fuel/cleaner-air government policies.
PetroChina, controlled by CNPC, is betting big on boosting natural gas production in line with the Chinese policy to increase its gas production and industrial and residential gas use.
Sinopec, for its part, said in its official newspaper that it plans to drill 66 new natural gas wells and install 23 gas drilling stations during the winter to raise natural gas supply from its fields in southwestern China.
Sinopec’s domestic crude oil production inched up by 0.2 percent between January and September, while natural gas output increased by 5.9 percent, the company said in its earnings release last week.
Natural gas production rose by 6.2 percent annually in January-September and by 8.5 percent on the year in September, the statistics bureau said in October.
Although natural gas production is rising, China is importing—and is expected to continue to import—growing volumes of gas.
Natural gas imports jumped by 28.3 percent annually in September and by 34 percent in January-September, the National Bureau of Statistics said.
According to the Gas 2018 report by the International Energy Agency (IEA), because domestic production can’t keep up with demand, China will become the world’s largest natural gas importer by 2019. Due to the country’s policy to reduce air pollution, China is expected to account for 37 percent of the global increase in natural gas consumption between 2017 and 2023, more than any other country.
By 2023, China’s natural gas demand is expected to rise by an average 8 percent per year, accounting for over a third of global demand increase, the IEA said in its report. The share of imports in China’s natural gas supply is seen rising from 39 percent to 45 percent by 2023, the agency forecasts.
Chinese companies are trying to increase domestic oil and natural gas production—and are succeeding in gas output—but the pace of China’s oil and gas demand growth means that imports will play even more of a leading role in its future energy demand and in the global oil and gas markets.
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