Power plants gobbling up natural gas but it will not impact winter prices

By John Funk, The Plain Dealer 
on August 11, 2016 at 8:30 AM, updated August 11, 2016 at 8:35 AM

CLEVELAND, Ohio — Natural gas outstripped coal as the fuel of choice for power companies in July, the U.S. Energy Information Administration said this week.

But the record consumption won’t affect your heating bills very much this winter.

The reason?

Even with increased demand from power plants, the gas industry is expected to start this winter with record amounts of gas in storage, which analysts believe will keep prices low, assuming there is a normal winter.

Christopher McGill, vice president of policy analysis at the American Gas Association, has concluded that because of the enormous amount of gas that will be in storage by Nov. 1, wholesale prices this winter should be about $3 per 1,000 cubic feet, or 1 Mcf.

Northeast Ohio residents annually use an average of 96.9 Mcf, according to Dominion East Ohio company calculations.

For Columbia Gas of Ohio residential customers, that level would be expressed in units of 100 cubic feet, or 969 Ccf.

Gas at $3 per Mcf is a little higher than last winter when the highest contract commodity price was $2.37 in January. But $3 is still affordable, said McGill, and it signals to gas producers that they will be able to earn enough to cover the cost of drilling new wells.

The EIA believes that demand for gas by the electric power industry will fall next year as the price of the fuel increases and power companies with coal burning plants generate more power.

Finally, July’s record heat across the nation that drove up demand for power to run air conditioning equipment will disappear with the arrival of fall, increasing the amount of gas that will be pushed into storage.

The EIA noted in this week’s outlook that power-plant demand for gas was so high last month that gas suppliers had to pull a small amount of gas out of winter storage during the last week in July.

A summertime withdrawal from winter storage large enough to affect week over week storage levels had not occurred since 2006, which was a year after Gulf of Mexico hurricanes shutdown deep water gas wells and slammed gas-processing plants and pipeline hubs on the Gulf Coast.

It was also well before the shale gas boom began that added billions of cubic feet of gas to annual production rates and made Gulf of Mexico gas less important.

The power industry’s ever-increasing demand for cheaper-than-coal natural gas comes just when gas production has slowed slightly because the glut of gas has dramatically depressed prices and forced producers to park their drilling rigs.

Although the situation sounds like a recipe for gas price spikes this winter, the EIA, like the American Gas Association, is also forecasting only moderate price increases in the coming months.

The EIA notes that the gas industry began last winter with slightly higher than average storage levels; but because of a warmer-than-anticipated winter, demand was not as high and the industry emerged in the spring with record levels of the fuel still in storage.

Looking at current storage levels, the amount of new gas being produced and the expected demand over the next few months, the EIA is predicting that the industry will have more than 4 trillion cubic feet of gas in underground storage by Nov. 1.

The agency is projecting that wholesale spot prices of natural gas will average $2.41 per Mcf, or 24 cents per Ccf for this year and that the average price in 2017 will be $2.95 per Mcf.

The August gas contract price, set July 27 on the New York Mercantile Exchange, is $2.67 per Mcf.  The September contract price, which will not be set until Aug. 29, closed Wednesday at $2.57.