The spot price of natural gas at Henry Hub averaged $2.85/ million British thermal units (MMBtu) in May, after averaging $2.61/MMBtu in April, with the U.S. Energy Information Administration (EIA) expecting monthly average natural gas prices to rise somewhat through the summer as air-conditioning demand increases, but remain below $4/MMBtu throughout the forecast period.
EIA on June 9 released the latest version of its Short-Term Energy Outlook (STEO), which said that while freeze-offs hampered some gas production this past winter, preliminary data sources indicate natural gas production growth resumed in April and May. EIA forecasts July production will exceed the previous monthly record set in December 2014.
Working natural gas inventories increased by 132 Bcf for the week ending May 29. Following this build, natural gas inventories exceeded the previous five-year average for only the second time since late 2013.
EIA’s forecast of U.S. total natural gas consumption averages 76.7 Bcf per day (Bcf/d) in 2015 and 76.6 Bcf/d in 2016, compared with 73.5 Bcf/d in 2014. Consumption growth in 2015 is largely driven by demand in the industrial and electric power sectors. EIA projects natural gas consumption in the power sector to grow by 13.7% in 2015 and then fall by 2.7% in 2016. Low natural gas prices support increased use of natural gas for electricity generation in 2015.
Industrial sector consumption increases by 3.6% in both 2015 and 2016, as new industrial projects come online, particularly in the fertilizer and chemicals sectors, and as industrial consumers continue to take advantage of low natural gas prices. Consumption of natural gas in the residential and commercial sectors is projected to decline in 2015 and 2016.
EIA expects that marketed natural gas production will increase by 4.2 Bcf/d (5.7%) and by 1.6 Bcf/d (2.0%) in 2015 and 2016, respectively. This month’s STEO lowers the 2015 production outlook by 0.3 Bcf/d to reflect revisions in historical data. However, production remains high and EIA expects continued growth through 2016, with increases in the Lower 48 states expected to more than offset the long-term declining production in the Gulf of Mexico.
On May 29, natural gas working inventories totaled 2,233 Bcf, which was 751 Bcf (51%) above the level at the same time in 2014 and 22 Bcf (1%) above the previous five-year (2010-2014) average for that week. So far during the inventory refill season, injections have surpassed the five-year average injections by a wide margin. EIA projects end-of-October 2015 inventories will total 3,912 Bcf, which is 115 Bcf above the five-year average for that time.
The Henry Hub natural gas spot price averaged $2.85/MMBtu in May, an increase of 24¢/MMBtu from the April price. EIA expects monthly average spot prices to remain lower than $3/MMBtu through June, and lower than $4/MMBtu through the remainder of the forecast. The projected Henry Hub natural gas price averages $2.97/MMBtu in 2015 and $3.32/MMBtu in 2016.
Natural gas futures contracts for September 2015 delivery traded during the five-day period ending June 4 averaged $2.69/MMBtu. Current options and futures prices imply that market participants place the lower and upper bounds for the 95% confidence interval for September 2015 contracts at $1.79/MMBtu and $4.03/MMBtu, respectively. At this time last year, the natural gas futures contract for September 2014 delivery averaged $4.58/MMBtu and the corresponding lower and upper limits of the 95% confidence interval were $3.54/MMBtu and $5.92/MMBtu.
U.S. coal output expected to fall this year
Cheap natural gas and other factors like environmental regulation have led to tough times over the last three years for the U.S. coal industry. EIA projects that lower coal demand for domestic consumption and exports contribute to a 70 million short ton (MMst) decline in production for 2015. Production is expected to decline in all coal-producing regions, with the largest decrease in Appalachia (34 MMst, or 13%). Declines in the Interior region and Western region are projected to be 3% and 6%, respectively. Coal production is projected to remain near 2015 levels in 2016.
In response to weak coal demand, several producers have recently announced cuts in production. The expected production cuts are reflected in announced employee layoffs. Previously announced employee layoffs primarily affected Central Appalachian producers, but the current planned reductions are more widespread, affecting production in Central and Northern Appalachia and in the Illinois Basin.
EIA noted: “Ohio-based Murray Energy announced it would lay off more than 1,800 miners in Illinois, Ohio, and West Virginia. Alpha Natural Resources (Alpha) stated that it was idling more than 400 employees in West Virginia, Kentucky, and Virginia. Earlier in May, Alpha had announced more than 60 layoffs at a mine in Kentucky. Although it is not reducing its workforce, Consol Energy announced it was switching to a four-day work week at several mines in Pennsylvania.”
EIA said it expects a 7% decrease in coal consumption in the electric power sector in 2015, despite a 1% increase in total electric power generation. Lower natural gas prices are the main driver of the decline. Projected low natural gas prices make it more economical to run natural gas-fired units at higher utilization rates even in regions of the country (Midwest, South) that typically rely more heavily on coal-fired generation. Increased generation from wind, solar, and biomass is also expected to displace coal-fired generation, as several biomass facilities have been converted from coal-burning facilities.
“The retirements of coal power plants in response to the implementation of the Mercury and Air Toxics Standards also reduce coal demand in the power sector in 2015,” EIA wrote. “The full effect of the coal plant retirements on capacity will be felt in 2016, but projected rising electricity demand and higher natural gas prices are expected to contribute to higher utilization rates among the remaining coal-fired fleet. Coal consumption in the electric power sector is forecast to increase slightly in 2016.”
EIA projects coal exports will fall by 8 MMst, to 89 MMst, in 2015, and then increase by 1 MMst in 2016. U.S. coal imports, which increased by more than 2 MMst in 2014 to 11 MMst, are expected to remain near that level over the next two years.
The annual average coal price to the electric power sector fell from $2.39/MMBtu in 2011 to an estimated $2.36/MMBtu in 2014. EIA expects the delivered coal price to average $2.30/MMBtu in 2015 and $2.31/MMBtu in 2016.
Electricity demand will in large part drive all fuels
There is wide variation in the average electricity usage projections, with the typical residential customer in the Pacific states consuming 1.9% less electricity than last summer, while customers in the East North Central area consume 6.3% more electricity. Electricity prices in all areas of the United States except for the Middle Atlantic and the East South Central are expected to be higher this summer than last summer. Residential customers in New England are expected to see the largest increase in electricity bills because of a 15.4% projected increase in summer retail prices. Customers in the West South Central states are expected to experience the lowest overall increase in average electricity bills this summer (2.1%).
NOAA projects warmer temperatures this summer than during last year’s mild summer. U.S. cooling degree days during June, July, and August of 2015 are projected to total 7.3% more than the same period last year. Higher temperatures should lead to increased use of electricity for air conditioning. EIA forecasts U.S. retail sales of electricity to the residential sector in June, July, and August to average 3.5% more than last summer. Forecast annual U.S. residential electricity sales during 2015 average 0.2% higher than in 2014. EIA expects U.S. retail sales of electricity to the commercial and industrial sectors to grow by 1.6% and 0.4%, respectively, during 2015.
Total U.S. generation of electricity is forecast to average about 11,309 gigawatt hours per day (GWh/d) in 2015, which is 0.8% higher than total generation last year. EIA forecasts that coal’s share of U.S. total generation will average 35.6% in 2015, down from 38.7% in 2014. In contrast, the natural gas fuel share averages 30.9% this year, up from 27.4% in 2014.