Today, the Energy Information Agency (“EIA”) reported that natural gas in US storage increased by 88 Bcf to reach a total of 2,357 Bcf as of Friday, May 28, 2010. Down from the 104 Bcf added to storage the previous week but still 306 Bcf above the 5-year average of 2,051 Bcf.
For months we have been writing on the Horn River News about the curse and blessing of shale gas. The good news is there is a massive amount of natural gas in North America due to the ability to unlock the resource from tight shale gas formations. The bad news there is a massive amount of natural gas. This was coupled with the fact that the shale gas boom came about at the worst possible time. As the saying goes… “timing is everything”. Reduced demand from a recession, and an increase in supply took natural gas prices down to new lows. But that is not the curse. Its part of the blessing. And the sooner we realize this and take advantage of natural gas as an affordable, cleaner fossil fuel the better.
During 2005, natural gas prices were heading towards $16 because of supply disruptions caused by Hurricane Katrina, and Rita. Natural gas prices have always been effected by weather. Colder then normal winters drive up demand for heat, and hotter then normal summers drive up demand for air conditioning. Both made possible through the consumption of natural gas. Add to the weather impact the effect of the “hurricane season” which runs from June 1st to November 30th. On May27th when the EIA announced an increase of natural gas in storage of 104 Bcf, the National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center announced their hurricane forecast and outlook that predicts the 2010 hurricane season will be an “active to extremely active” one. So the market is speculating based on the NOAA prediction and were up.
At the same time the fact remains that supplies are well above 5 year average and production continues to go up. Natural gas producers are in a very challenging position. Going back to 2007 there was a bidding war for shale gas assets. Companies made huge capital investments into acquiring land leases for shale gas plays. These companies are forced to develop these plays in order to maintain the leases and avoid losing their original capital investment. The end result is that we are seeing an increase in production during a shoulder season in advance of the summer cooling season and hurricane season which is taking storage levels to above average numbers.
A disruption in natural gas supplies from an active hurricane season can quickly draw down storage numbers but it is really the last thing anyone really wants right now. British Petroleum (“BP”) and the US have their hands full trying to clean up the Gulf and some cooperative weather conditions would be welcome. Time will tell.
National Weather Service: 2010 Atlantic Hurricane Season Outlook