Robust gas-fired power demand served its purpose in rebalancing the gas market.
Since the start of the injection-season, the year over year (y/y) storage overhang has eroded from ~900 Bcf (billion cubic feet) to ~300 Bcf largely on the back of almost 4 Bcfpd (billion cubic feet per day) stronger y/y gas-fired power demand. In a sub-$3 gas price environment, gas-fired power generation served as the corrective mechanism to reduce the storage surplus. Not surprising, as we suggested at the time, natural gas prices reached their nadir in April.
The necessity of low gas prices, and corresponding anomalous strength in gas-fired power demand, is now receding, and we believe gas-fired power demand should wane later this year. In ’13, given our $4 natural gas price expectation, we expect gas-fired power demand to decline ~1 Bcfpd.
Gas-directed drilling has overcorrected to the downside against the backdrop of extraordinarily weak gas prices. In the wake of extremely weak gas prices, the exploration and production industry has cut gas-directed activity to ~450 rigs, which is markedly below 650-675 gas rigs necessary to maintain long-term market balance.
Specifically, the gas market is currently 1.5-2 Bcfpd under-supplied on a weather normalized basis. Consequently, gas storage should be meaningfully lower y/y exiting the ‘12/’13 heating-season. As presented in figure 1, we expect gas in storage to approximate year-ago levels around year-end and, assuming 15- year average winter weather, exit the ‘12/’13 heating season ~500 Bcf below the prior year. If the storage dynamics materialize as displayed, our $4 gas price forecast next year has upside bias.
As shown in figure 1, our analysis also suggests November ’13 gas-in-storage should approximate 3,500 Bcf, a level comparable to November ’08. Notably, in the fall of ’08, natural gas prices were above $7.
John Gerdes is managing director and senior analyst covering exploration and production companies for Canaccord Genuity.