Overview (For the Week Ending Wednesday, February 9, 2011)
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Despite frigid temperatures through much of the country during the report week, prices fell by moderate to significant amounts in most areas. The Henry Hub price fell by 7 percent, or 33 cents, from $4.55 per MMBtu to $4.22 per MMBtu. Despite unusually frigid weather in Texas and the Midcontinent, prices still fell in those areas, even as demand spiked and some production was curtailed due to freeze-offs. For example, at the Houston Ship Channel, the price of natural gas declined from $4.51 per MMBtu on Wednesday to $4.20 per MMBtu yesterday (though it spiked to $5.72 during trading on Thursday). Likewise, at the CenterPoint West transmission point in the Midcontinent, prices dropped on the week from $5.78 per MMBtu to $4.33 per MMBtu.
Exceptions to price declines occurred solely in the Northeast, where prices increased by more than a dollar per MMBtu at most locations. At the Transcontinental Pipeline's Zone 6 trading point for delivery into New York City, the spot price rose from $9.03 per MMBtu on Wednesday to $11.65 per MMBtu yesterday, as the region was hit once again with more wintry weather.
Extremely cold weather throughout the United States led to production freeze-offs in many areas. The cold temperatures led to freeze-offs of production facilities, operational difficulties on natural gas pipelines, shutdowns of processing plants, and spikes in demand. Natural gas production for the week dropped almost 5 percent from the previous week, with the most severe effects in the Midcontinent region, according to a report released by BENTEK Energy, LLC. On February 4, production in the Midcontinent fell more than 40 percent from late January levels. (See Other Market Trends for more information on the effects of the cold weather on supply and demand).
The frosty temperatures led to spikes in demand, and even power interruptions. Texas power generators were hampered by cold temperatures, leading the Electricity Reliability Council of Texas (ERCOT) to impose rolling blackouts, as more than 50 power plants in ERCOT's region tripped offline. Residential and commercial natural gas demand was 8 percent higher this report week than the previous report week. Likewise, power demand jumped 22 percent from the previous week, likely the result of the cold temperatures in Texas and other areas dependent on electric power for heating.
At the NYMEX, the price of the near-month (March 2011) futures contract fell to $4.044 on the week. This represents a decline of almost 39 cents. The value of the 12-month strip (the average of futures contracts between March 2011 and February 2012) fell by 29 cents, from $4.697 per MMBtu to $4.404 per MMBtu.
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Working natural gas in storage fell to 2,144 Bcf as of Friday, February 4, according to EIA's WNGSR (see Storage Figure). The 209 Bcf draw is considerably larger than the 5-year average draw for the week of 159 Bcf and last year's draw of 180 Bcf. Stocks are now 98 Bcf below last year's level and 45 Bcf below the average. This marks the first time since January 2010 that stocks have fallen below the 5-year average.
The week's draw marks the third week in a row that stocks have declined more rapidly than last year. While the previous two weeks' increased draws can be explained largely due to colder weather year-over-year, this week actually witnessed slightly warmer weather than the corresponding week last year. However, increased demand for natural gas from the power sector and cold weather in gas producing regions leading to freeze-offs and shut-in production during the week necessitated a larger draw than might have been expected.
Temperatures in the lower 48 States during the week ending February 3 were colder than normal for the second week in a row but warmer than last year. The National Weather Service's degree-day data show that the temperature in the lower 48 States last week averaged 32.1 degrees, 2.0 degrees warmer than the previous week, but still 2.0 degrees colder than the 5-year average (See Temperature Maps and Data). Temperatures were 1.9 degrees warmer than last year. Every region of the country was colder than normal with the exceptions of the South Atlantic and East South Central census regions. Heating degree days nationwide were about 6 percent above average, but 5 percent below last year.
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Other Market Trends
Record Cold Triggers Decline in Supplies, Emergencies in Southwest. U.S. dry natural gas production declined by an estimated 5.4 billion cubic feet per day (Bcf/d) during last week's deep freeze in the West, Midcontinent, and Gulf of Mexico regions. According to BENTEK, from January 31 to February 4, cold weather in these regions led to freezing of equipment at wellheads and malfunctions of gathering and other transportation systems. Although such incidents are recorded nearly every winter, declines in supplies last week were clearly the most severe in recent years. BENTEK noted that a recent shift in drilling and production toward zones with higher content of natural gas liquids likely worsened the impact of the cold weather. BENTEK data indicate that gas production dropped the most in the Fort Worth Basin, where production was down more than 1 Bcf/d from recent levels. However, large declines of more than 0.4 Bcf/d also occurred along the Texas Gulf Coast and in the Permian Basin in West Texas. At the same time as these production declines, demand increased steeply for natural gas as a fuel for space heating and as a fuel to electric power plants. For example, BENTEK noted that through February 4 consumption in the Midcontinent region this month was up 65 percent from average levels in January, while demand in Texas was up 38 percent from average January levels. In Texas, the weather event strained power plants and processing plant operations and many plants failed, resulting in rolling black-outs in the State. In neighboring New Mexico, these system stresses during the weather event left over 20,000 customers of New Mexico Gas Company without natural gas. On Thursday, February 3, New Mexico Governor Susana Martinez declared a State of Emergency due to natural gas outages. BENTEK noted that flow dynamics on intrastate and interstate natural gas pipelines changed significantly during the weather event. As an example, the firm notes that about 3.2 Bcf/d of gas normally flows north from the Anadarko and Permian basins to markets in the Midwest, but last week, northbound flows fell to only about 1.5 Bcf/d. Also, although West Texas normally supplies about 1.0 Bcf/d to Oklahoma, flows on Friday were cut to zero.
EIA Forecasts Slower Production Growth in 2011. In EIA's Short-Term Energy Outlook (STEO), released February 8, 2011, EIA forecast that natural gas marketed production will increase 0.8 percent in 2011, considerably less than the 4.4 percent growth in 2010. The lack of production growth stems from projections of relatively low prices, which lead to reduced drilling activity. Annual average Henry Hub spot prices are also expected to decline slightly in 2011, falling $0.23 per MMBtu from an average of $4.39 per MMBtu in 2010. This month's STEO expects that in March 2011, inventories of working natural gas in storage will drop to 1,651 Bcf over the winter heating season, falling from its end-of-October level of 3,835 Bcf. This leaves storage levels above the five-year average (2006-2010) end-of-March inventory level of 1,576 Bcf.
Total natural gas consumption will remain flat from 2010 to 2011, according to the EIA forecast. Reported residential and commercial consumption levels are expected to decline by 0.3 percent and 2.4 percent, respectively, primarily because of changes to EIA's methodology for collecting and reporting natural gas consumption data (see Changes in Natural Gas Monthly Consumption Data Collection and the Short-Term Energy Outlook). Industrial consumption rises from 18.0 Bcf/d in 2010 to 18.3 Bcf/d in 2011, as the natural-gas weighted industrial production index increases 2.4 percent year over year.
Natural Gas Transportation Update
See Weekly Natural Gas Storage Report for additional Natural Gas Storage Data.