Cheap Natural Gas Stimulates Mid-Continent Fuel Switching

MISO Electric region has been quick to respond to changing gas prices, on the way up and now back down.  Gas is quickly recovering the market share lost to coal since gas prices began rising in November:

Yesterday's large increase in gas fired power generation set a big new high for the month of February, and put it on par with last February, despite current prices being 75 cents higher than last year.

This suggests that despite the weak weather, low aggregate power demand, and rise of renewables, and expected production bolus, it may be difficult to pierce a lower price boundary during the shoulder season.  If $2.50 gas stimulates the same power burn demand as last year's sub $2 pricing, then it should be more than adequate to keep inventories in line.

We still have a few more weeks of weather influence before the mildness of late march limits cold spikes, so volatility can still prevail.

Why is the Natural Gas Forward Strip Price Cheap and Getting Cheaper?

Even though it seems impossible that our government could issue such a forecast, here is the February Short Term Energy Forecast for Natural Gas Marketed Production.  It projects that just 22 months from now, production will rise from 76.9 BCFD to 85 BCFD.  That seems far fetched, but it may not be far from consensus.  If this prevails, we will see low $2 gas in all likelihood.  But I don't consider it likely that we will hit these production milestones.  

Anything close to these output levels will devastate the gas market.  There is no outlet for this gas beyond slight upticks in LNG capacity, and a mild, 1 BCFD increase in pipeline exports to Mexico.

However, the EIA has made large downward revisions recently to it's forecasts.  Here is the same forecast shown above, but with the same actual/forecast estimates from Aug '16 (6 months ago).  The Feb '17 production forecast has dropped by 3.2 BCFD!

Natural Gas: The Cure For Low Prices

The case study that is MISO coal/gas switching continues to reflect the dynamics of a changing price environment for gas.

The very recent crashing prices are sparking, as it were, a resurgence in gas fired power generation.  

Although there is no gas price so low that it stimulates cold weather, the recent days have seen gas retaking market share, with yesterday's demand adjusted market share at 30%, which is double the February average, and within 6% points of the levels of last November, when gas was around $2.75.  We should see abrupt increases in market share all week, if the December price spike is any indication of the rapidity of the price response.

Warmest Weather In Decades Suppressing Natural Gas Demand

I suppose the fact that gas is still near $3 despite a -400 HDD anomaly this winter is a testament to the improving fundamentals.

Nevertheless, forecasts for the next two weeks keep getting warmer, and it will feel like late April across much of the CONUS:

Coal to Gas Switching in MISO, Beginning to Reverse?

Natural Gas usage for power generation in the MISO region continues to be much below 2016.

Back in November, gas was near 40% of the carbon power market in MISO, and well above the prior year as well.  With the price rise in late November, the situation reversed.  That situation was enhanced of course by low aggregate demand due to mild weather.  

With prices falling and now breaking through $3.00, it seems that gas will regain much of that lost market share, though probably not comparable to last year as prices were more like $2.00 then:

Haynesville Shale: Rig Counts Rise +3 to 34, vs 15 Last Year. Gas Production Outlook?

Rig counts have been steadily rising in the Haynesville Shale for a very long time now.  The production response has been muted/sluggish/nonexistent thus far.  

Louisiana has a well production reporting system that has a 4-5 month lag before data is substantially complete, so November '16 is solidifying now, and it shows a slight uptick in daily production, though the plateau in output that prevailed for the prior 15 months hasn't been decisively broken.  

The two parishes that contribute the lion's share of output (70%), Caddo and DeSoto, are shown below as well.  The long lag in reporting makes this data fairly backward looking, but even so.  

Western Canadian Gas Production Continues to Falter

Despite the year-on-year higher rig counts, receipts on the TC Nova system have been averaging well below last year, and storage draws on the system reflect that as well.  A few more weeks of this and the storage surplus will be eroded.  

A close-up of the same data:

Changes in Coal vs Natural Gas Power Generation

This chart requires some explanation.  I've taken each day's total thermal generation (gas + coal) in the MISO region, and calculated the BCF equivalence.  I then graph this against the natural gas market share of that day's thermal generation.  

There is a polynomial line calculated from the daily data points for each month of winter this year.

What it all means:

• At every level of thermal power generation, the nat gas share of that generation declined in each subsequent month.  For example, at 10 BCFE of thermal generation, gas had 35% share of that in November, 21% in December, 18% in January, and then finally recovering a bit to 24% so far in February.  
• This is an attempt to delineate the impact of the rising price of gas through the winter, and now the recent decline as well.  Gas was pretty cheap last November, around $2.75.  Now that gas is settling back to $2.90's, we should see the beginnings of a recovery in market share.  We are, but not in a quick and radical way yet.  There may be latency, or there may be other issues, like gas still too expensive.  

Mild Weather Outlook Puts This Winter Equal to Last Winter in Low Heating Requirements

The 7 day forecast from NOAA puts the Oct-Mar heating degree day count 19 below last year, and a whopping 388 HDD's below normal.

Natural Gas Inventory Falls 87 BCF

Near Record CONUS Warmth Dims Natural Gas Demand Outlook for Feb

The charts say it all.  If the forecast does not moderate, the end of season storage target will rise sharply:

Western Canada Finishes January Trending Higher in NG Production, Storage Lower

Alberta's TC Nova system exited January at 11.3 BCFD in pipeline receipts, which was comparable to 2016 and resulted in a monthly average of 11.1 BCFD, which was about 0.1 BCFD below last year.

In 2016, the system reported its annual high production in February, exceeding 11.4 BCFD.  The higher rig count over the past year should help 2017 beat that production average if weather is cooperative.  

Stronger demand, both for exports and domestic consumption, has led to larger storage withdrawals this January vs last.  The month ended with 33.3 BCF withdrawn, vs 21.3 BCF last year, resulting in a diminution of the surplus in storage with which the year began.

The close up view: