Natural Gas Inventories "Dangerously Low" -- Contributor Over At Oilprice -- August 25, 2018

Updates

September 4, 2018: so much for CO2 and global warming. The Brits are going to use a lot of coal this winter. Natural gas getting too expensive; coal is cheap. Link at Platts (beware: lots of jargon):

Bullish NBP spot and winter contract gas prices have focused the power market's attention on the UK's coal-fired power plants, which have recently become more economical to run in the summer as well as in the winter.

The gap between prompt NBP gas and the coal switching channel indicates that, if and when needed, thermal generation is going to be predominantly coal-fired this winter, with higher gas prices opening the way for increased coal-fired generation, despite a strong hike in carbon prices.

Data show 35% efficient coal-fired plants are competing with 45% gas-fired plants.

The UK month-ahead coal-switching price for 45% efficiency was 68.43 pence/therm on Monday, slightly lower than the NBP day-ahead contract assessment of 69.70 p/th.

However, UK month-ahead CSP for 50% efficiency was 78.19 p/th. Platts CSPI is the theoretical threshold at which gas is more competitive than coal in power generation.

When the gas price is higher than the CSPI, CCGTs are more expensive to run than coal-fired plants.

"Despite the gains in carbon over recent months, coal generation has been supported this week by particular strength in the gas market," according to S&P Global Platts Analytics.

"We forecast gas to lose ground this winter too, with the Q1-19 Clean Dark Spread above the Clean Spark Spread. As a result we expect coal generation to be stable year-on-year this winter, despite the closure of 2GW of capacity, while gas generation is forecast to fall more than 3 GW vs Winter-17."

August 26, 2018: Europe's natural gas prices surge to record for summer season.

Europe’s natural gas market is the most bullish it has been in years, as higher-than-expected summer demand and a tighter market drive natural gas price futures to levels last seen during this past winter’s supply crunch and to the highest for a summer season.

Natural gas prices are expected to stay strong and may still have room to rally, ahead of the next winter heating season in Europe that begins in October. 

Contrary to the typical summer lull in Europe’s gas prices, this year the front-month gas price in the UK—Europe’s biggest gas market—for example, is nearing the winter price from December 2017 when a deadly explosion in Austria’s gas hub at Baumgarten squeezed supplies throughout Europe. Immediately after the explosion, the price of gas for immediate delivery in the UK reached its highest level since 2013.

August 26, 2018: natural gas production in the US --

Gulf of Mexico Fact Sheet, EIA: Gulf of Mexico federal offshore oil production accouts for 17% of total US crude oil production and federal offshore natural gas production in the Gulf accounts for 5% of total US dry production. Comment: I believe the EIA data is for the entire US, including Alaska. RBN Energy often limits their NG production discussions to the "lower-48."

US natural gas production: EIA update, December 4, 2017.

From the EIA:

Drilling wells in the Appalachia region has become very productive.

The average monthly natural gas production per rig for new wells in the Appalachia region increased by 10.8 million cubic feet per day since January 2012.

EIA attributes this increase to efficiency improvements in horizontal drilling and hydraulic fracturing in the region, which include faster drilling, longer laterals, advancements in technology, and better targeting of wells.

For example, in West Virginia, the average lateral length per well has increased from about 2,500 feet in 2007 to more than 7,000 feet in 2016. Some operators have recorded lateral lengths as long as 15,000 feet in the Marcellus and 19,000 feet in the Utica. Along with longer horizontal drilling, the days it takes for completion have decreased from about 30 days in 2011 to 7 days in 2015.

Comment: For comparison, lateral lengths in the oily Bakken are around 9,000 to 10,000 feet, and take about 10 days to reach TD, but the range can be quite wide, some still taking as long as 30 days (of course, that is not continuous drilling).

Note: in the EIA graph above, the Appalachia region was producing about 20 billion cf/d as of 2017. The chart below suggests about 25 billion cf/d during 2017. But notice the current rate of production in the Marcellus, nearing 30 billion cf/d in September, 2018. Maybe that's why folks are not concerned about that widening gap in the "natural gas fill rate" as noted in the original post.

Current Appalachia production, ycharts:

Original Post

The following was previously posted, just a few days ago.

NG fill rate, link here. I still think this is going to be the most interesting metric to follow this winter. If it's a cold winter, and if storage rates fall outside the historic minimum going into November, and if the US shale natural gas operators can meet natural gas demand this winter, it means tracking natural gas fill rate is almost meaningless:

Update: I think this is one of the most fascinating stories currently being followed.

If this is a cold winter, it will be interesting to see if the natural gas sector can respond. It it is a cold winter and the natural gas sector responds "without missing a beat," it will suggest to me that the tracking of this metric is absolutely unnecessary.

Having said that, look at this article today from "Ag Metal Miner" over at oilprice.com:

Futures markets are suggesting the currently benign level of natural gas price volatility may not remain through the winter months.

According to the Financial Times, market volatility this year has been the lowest on record despite inventory levels falling 19.5 percent below average and by the time winter starts are set to be at their lowest in more than a decade.

The Financial Times puts this down to investors being lulled into complacency by a seemingly unstoppable wave of new supply from the shale market rising inexorably to meet rising demand.

The government last week forecast 81.1 billion cubic feet per day in dry gas production for 2018 — a record high — and up by 7.5 billion cu ft/d from 2017.

But is the market safe to assume shale gas will supply regardless of demand?

Natural gas producers are systematically hedging their sales throughout next year, often a sign they plan to continue an aggressive policy of drilling and expansion.

That activity has contributed to a dipping of forward prices, as there are more sellers in the futures market than buyers.

But inventory levels are low — some would suggest dangerously low — after a high summer demand due to hot weather increasing demand for air conditioning. Natural gas “power burn” surged to a record 37.7 billion cubic feet per day during July, the Financial Times reports.

So, we'll see.

The FT story is behind a paywall. I could not get to it "thru" oilprice.com but I was able to google and get to it "thru" a Yahoo link.

From the FT article:

When US natural gas futures passed a milestone this month, they did so quietly: volatility fell to the lowest levels since the market’s debut nearly 30 years ago. 

The event seemed improbable. Volatility usually fades when commodity stocks are ample. Yet US gas stocks are 19.5 per cent below average. 

When the winter starts they are set to be at their lowest in more than a decade. This situation is the latest example of how the world’s largest gas market has been transformed by shale drilling. While demand for gas is galloping, it has been met by waves of supply that show no sign of abating. Conditions that put traders on edge a decade ago get shrugs.

And that's way I think it will be fascinating to watch this play out this winter. Especially if it's a cold winter.

Wow, I love to blog.