It is annoying to be right when you are hoping to be wrong. Yes the natural gas market did bottom out this past spring and now we are looking at prompt month natural gas prices in the $3.50/MMBtu range, $1.55/MMBtu higher than the low set on April 17th (see the graphic below). It was argued this past summer that if prompt month natural gas prices rose above $3.00/MMBtu owners of generation with a portfolio of fuel types would switch to coal. In fact this seemed to be the case during the summer. Each time natural gas prices would approach $3.00/MMBtu, prices would be pushed back down with the exception being the latter half of July when it was exceptionally hot.
It wasn't until the end of September that natural gas broke through the $3.00/MMBtu resistance. Soon after the closing of the October contract prices, the November contract moved quickly to $3.53/MMBtu by October 2. Since then prices have been back and forth but below $3.50/MMBtu.
The jump in natural gas prices has been attributed to the seasonal change in weather and higher demand. The EIA in its October 10th Weekly Outlook notes that east of the Rockies weather is expected to be nearly normal. A normal winter though is still 20% colder than the incredibly mild winter we had last year.
Add to that demand is increasing. The EIA also reported in its October 10th Weekly Outlook that the demand for natural gas is up nearly 18.6% on a year over year basis spurred forward by a 38% increase in demand from the residential and commercial sectors as well as a 13% increase in the power generation sector.
The supply picture on the other hand has indicated a tightening. While natural gas storage as of October 26th was 3,908 Bcf, 3.6% higher than last year's 3,772 Bcf and higher than the record set last year of 3,849 Bcf, the average weekly injection in 2012 has been very low. In 2011 the average weekly injection was 70 Bcf while in 2012 the average weekly injection has only been 44 Bcf. So production has slowed. Further evidence of slowing production is that Baker Hughes reports that the number of rigs dedicated to natural gas is down to 416 a drop of 518 from where it was at the end of last October.
So the outlook has gone from neutral to bullish, higher demand exacerbated by lower production may continue to push natural gas prices and therefore power prices higher throughout the winter.
