Natural Gas Market Update
Today’s natural gas prices are primarily driven by U.S. domestic production, consumption for winter heat load, industrial/commercial activity, and electricity generation that uses natural gas-fired turbines.
An abundance of natural gas resources in the U.S., coupled with enhanced drilling techniques, has led to historic increases in natural gas production. In May 2015, natural gas production in the U.S. reached an all-time high of 45.6 billion cubic feet per day in the shale regions, including the Marcellus in Pennsylvania. In August 2015, the U.S. Energy Information Administration (EIA) Short Term Energy Outlook predicted that total U.S. gas production would increase by 4 billion cubic feet per day in 2015 compared to 2014, reaching 78.7 billion cubic feet per day.
Horizontal drilling and hydraulic fracturing, also known as “fracking,” are innovative techniques for capturing natural gas in shale formations, including the Marcellus Shale, the largest source of natural gas in the U.S. Covering 104,000 square miles, the Marcellus Shale expands across much of Pennsylvania and West Virginia, and parts of Ohio and New York. Natural gas discovery and production in the Marcellus Shale is expected to increase year-over-year.
Since 2011, approximately 30,000 new wells were drilled annually using fracking techniques in more than 20 states, according to the U.S. Environmental Protection Agency (EPA). Increased production has reduced dependence on foreign natural gas imports, and has driven down natural gas and electricity prices.
As another winter season approaches, gas demand for heating and power generation is projected to increase. Natural gas storage levels are a primary driver of price trends for both gas and, in turn, electricity. As of October 2015, replenished natural gas storage inventories were 13.6% higher than at the same time in 2014, and 4.7% higher than the five-year average. Industry experts are confident that storage levels are sufficient to meet winter heating demand.
In contrast, the amount of natural gas in storage steadily dropped for an extended period until it hit an 11-year low in April 2014. Extreme winter cold weather in late 2013 and early 2014 substantially increased natural gas demand for heating and electricity generation, which caused deep draw-downs of storage inventories. Eight of the 10 highest days of winter demand levels for electricity ever recorded by PJM—the organization responsible for transmitting electricity in all or parts of 13 mid-Atlantic and Midwest states—occurred in January 2014. Winter weather across the U.S. in 2013-2014 produced the most volatile natural gas daily price swings in several years, and electricity prices climbed as well.
In April and July 2015, natural gas exceeded coal as the fuel of choice for electricity generation in the U.S. In response to federal mandates and regulations on toxic emissions, many power plants have switched or are planning a change from coal-fired to natural gas-fired generation. During the first half of 2015, 9,800 megawatts (MW) of coal-fired generating capacity was retired. The states with the largest amount of retired coal capacity include Ohio (2,659 MW), Georgia (1,861 MW), and Kentucky (1,409 MW). The EIA expects 60 gigawatts (GW) of coal-fired generation to retire by 2019, with 33% of retirements expected in 2015 alone. As electricity generation using coal has decreased, total U.S. coal production decreased 15% from 2008 to 2014.
The U.S. is expected to become a major exporter of liquefied natural gas (LNG) in the near future. U.S. net imports of natural gas decreased 9% in 2014 to the lowest level since 1987.
The 1,698-mile Rockies Express Pipeline recently began shipping gas west from the Marcellus and Utica shale formations, opening new markets. The U.S. Department of Energy gave final approval for the nation’s fifth major LNG export terminal in Corpus Christi, Texas, which will begin shipping LNG in 2018. Some industry experts expect LNG ultimately to surpass iron as the most valuable commodity after oil.
Manage and reduce costs
According to research conducted by the Energy Research Council, almost 70% of middle-market businesses use some level of natural gas. Gas and electricity consumers are well-advised to closely examine gas and electricity prices now because prices are at levels not seen in more than 10 years. Electricity price trends are closely linked to the natural gas market.
Consumers can gain more control over their energy budgets, and avoid potential price spikes this winter. Since 1996, APPI Energy has provided data-driven procurement and consulting solutions to thousands of clients with locations in every deregulated energy market in the U.S. If you have questions about energy markets, or want to learn more about how to manage and reduce energy costs, contact APPI Energy at 800-520-6685.