The U.S. Energy Information Administration (EIA) is reporting updated production, consumption and storage data for natural gas. For the short term, it appears there will be continued downward pressure on natural gas prices. Lower prices will benefit the U.S. economy, residential consumers and manufacturers such as Corning (GLW). It will also help natural gas transportation companies such as Clean Energy Fuels (CLNE) and Westport Innovations (WPRT).
If prices remain low, North America's liquefied natural gas (LNG) business will flourish. Companies such as Cheniere Energy Partners (CQP) could see additional spot business. Dominion Resources' (D) new master limited partnership for its Cove Point LNG and Blue Racer assets could also benefit.
EIA's report is a short-term view. A harsh winter could change everything. Even though the U.S. has the ability to store vast amounts of natural gas, total storage capacity is small compared with the amount of gas consumed.
This year is a good example. The EIA reports that working natural gas in storage is expected to reach about 3,800 billion cubic feet (bcf) by the end of 2013's injection season. This is only 88% of the nation's storage capacity of about 4,300 bcf.
In practice, storage of natural gas is more about hedging and distributed energy than it is about maintaining reserve margins. Producers and marketers store low-cost production and wait for high-priced markets. In addition, some utilities forward-position natural gas closer to the winter markets to remove costly capacity constraints on interstate pipeline systems.
Capacity constraints frequently appear during peak consumption periods. In the U.S., the peak consumption month is always January.
For natural gas, January's consumption is remarkably stable and predictable. For example, in January 2001, national consumption was about 2,700 bcf. In 2011, it was about 2,900 bcf. In 2012, it was 2,500 bcf. In 2013, it was back to 2,900 bcf.
January's consumption may be predictable, but the rest of the year is not. The EIA reports that there have been some surprises this year. During the second quarter of 2013, use of natural gas by electric power generators was down by about 20%, year over year. In addition, EIA projects third-quarter consumption to be about 12% less, year over year.
The EIA's natural gas report is the canary in the power industry's coalmine. Natural gas consumption is signaling an earnings problem for the power industry. Independent power producers' third-quarter earnings could be down, year over year. Consequently, the power-producing arms of Exelon (EXC), Entergy (ETR), NRG Energy (NRG), Calpine (CPN) and Dynegy (DYN) could see disappointing earnings from their sales of energy. However, their sales of capacity could mitigate some of the losses.
While energy producers in the power and natural gas sectors may seek tight margins, consumers in all sectors win. Lower energy prices provide a critical boost for the nation's economy.
The EIA's longer-term view appears to be more of the same. It forecasts total production for 2014 will look a lot like 2013. In addition, it expects prices to range from $3.70 to $4.40 per thousand cubic feet at Henry Hub.
While volumes and prices remain stable, sourcing is shifting. In 2011, the single largest new source of natural gas was from land-based wells. During that same year, net imports and natural gas production from the Gulf of Mexico declined. However, each year thereafter, new production from land-based wells declined until now.
Baker Hughes (BHI) suggests that current prices are motivating exploration-and-production companies to invest in new land-based gas wells. Over the last 20 weeks, gas rig counts are up by about 10%, to 386. While this is much lower than the 936 rigs counted in October 2011, it appears that the downward trend has bottomed and changed direction.
All other things being equal, it appears that 2014 will be a stable year for natural gas supplies and prices. This outlook for natural gas suggests another challenging year for electric power producers.