Natural-gas inventories have hit an 11-year low as a result of a long winter and a cold start to spring, according to a weekly government report released Thursday.
Energy companies are likely to ramp up natural-gas drilling this summer in an effort to replenish stockpiles before the winter, analysts said.
The U.S. Energy Information Administration said natural-gas storage fell by 74 billion cubic feet in the past week to 822 billion cubic feet, putting supplies almost 52 percent lower than they were this time last year.
“Nobody ever thought with the fracking we would see supplies get this low in inventories,” said Phil Flynn, an energy analyst with Price Futures Group in Chicago. “This has caught a lot of people by surprise.”
By the end of March, natural-gas withdrawals are normally between 5 billion cubic feet and 20 billion cubic feet, with some injections of gas into stockpiles, said James Williams, an energy analyst who operates WTRG Economics near Russellville.
“So that’s just a continuation of what we’ve seen really since December, which is much higher than normal withdrawals and much colder-than-normal weather,” he said about the latest report. “That means that we are going to need very high injections throughout this summer to be prepared for next winter.”
Almost half of American households use natural gas for heating, according to the federal agency.
But analysts said they are unsure whether natural-gas inventories can be restocked in time for next winter, even when anticipating record-breaking production this summer.
‘This is going to be a real challenge this summer for production,” Flynn said. “We are going to have to produce a record amount and put it in storage just to get back to what people consider full storage.”
He said this summer’s natural-gas production is going to depend heavily on how hot it gets.
Williams agreed, adding, “A lot of it will depend on how hot the summer is and the demand for natural gas to generate electricity.” But Williams expects inventories to be refilled in time.
Flynn isn’t so sure that enough natural gas can be produced in time.
“We’ve never produced that much natural gas before,” he said. “We’re really behind the eight ball, even with this record production … any supply interruptions will mean we won’t get back to storage.”
And if natural-gas stockpiles aren’t fully replenished by winter, “we’re going to see significant price spikes,” he said. “Heating bills are going to go through the roof.”
Prices are going to have to stay high to persuade energy companies to drill enough, Flynn said.
“I think the market is going to have a hard time falling because you have to inspire these people to produce a record amount of supply,” he said. “We have to inspire producers to produce unlike they have ever done before.”
As a result, analysts said the low inventories will likely make the industry vulnerable to price spikes this summer.
“Everything is going to have to work perfect in terms of storage and weather to get back to adequate storage going into the winter,” Flynn said. “Anything that goes wrong, that means we aren’t going to get there and that’s when prices run up.”
He said it is possible for natural-gas prices to hit $7 per 1 million British thermal unit if it is a very hot summer and there are supply interruptions.
Williams said he expects natural-gas prices to remain steady, but he said prices could reach $5 per 1 million Btu if the summer is exceptionally hot.
On Thursday, natural-gas prices rose 2.4 percent after the energy administration released its report. Prices for May delivery closed at $4.47 per 1 million Btu on the New York Mercantile Exchange.
Flynn said that if prices rise enough, it could generate more drilling to the Fayetteville Shale, where activity has lagged in recent years because of low prices and more profitable natural gas found in other shale formations.
“At first we didn’t need dry gas, and now we do,” he said, adding, “For those producers to come back online you are going to want to see prices higher.” “Dry” gas is mostly methane, while “wet” gas has more ethane and butane.
Williams said he doesn’t expect a big pickup in drilling in the Fayetteville Shale - there are only nine rigs operating in the formation.
“Most of the … gas will come out of the Marcellus and the Eagle Ford plays,” he said.
Business, Pages 27 on 04/04/2014