WINTER GAS SUPPLY MAY SET RECORD

The country is expected to begin this winter with plenty of natural gas in its pantry, with some firms anticipating record high levels.

That’s good news for those who rely on the fuel for heating and electricity. But that excess supply could be bad news for drillers and others who are being hit hard by low commodity prices.

According to Bloomberg data, gas inventories could hit new highs by the start of the heating season on Nov. 1.

“If injections for the rest of this year track 2014 levels, storage may come close to 4.3 trillion cubic feet, more than 300 billion cubic feet above earlier highs,” Bloomberg said.

That will keep natural gas prices low for the short term, even as new sources of demand arise, including exports of liquefied natural gas that are slated to begin from the Gulf of Mexico.

“We are trending toward alltime highs,” said Jeff Moore,

senior energy analyst for Colorado-based analytics firm Bentek Energy.

As of July 17, the most recent data available, U.S. storage inventories were at 2.8 trillion cubic feet (Tcf), after a net increase of 61 billion cubic feet (Bcf) from the previous week, according to the U.S. Energy Information Administration.

Overall, inventories were 622 Bcf higher than last year at this time and 81 Bcf above the five-year average of 2.7 Tcf.

In the east, where the prolific Marcellus Shale has helped feed the country’s oversupply, the amount of natural gas in storage reached nearly 1.3 Tcf, which is actually below the five-year average.

“The east region is an interesting region because that’s where the majority of the supply growth has occurred, and, currently, it’s the only region below the five-year average,” said Mr. Moore.

He said that unwillingness to max out capacity is a “bet on a cold winter.”

“This past winter was very cold, especially in the Northeast, and we withdrew a lot of gas — down to near historic low levels,” Mr Moore noted. “If we start this winter with record-high inventories, and we don’t have a cold winter, it won’t bring down supply, and it could look ugly for natural gas prices.”

The market is awash in natural gas, depressing prices. Moody’s Investor Services predicts Henry Hub, the national natural gas benchmark, will hit about $2.75 this year and rise slightly to $3 next year. Producers have responded to weak prices by scaling back drilling programs.

Power generation is the major source of demand as coal plants retire or switch to natural gas. Lower gas prices have edged out coal as an affordable fuel source. Meanwhile, power plant operators have moved away from coal to gas to meet federal mandates on emissions.

“You have to keep a lid on natural gas prices to help it keep its share in the power market,” Mr. Moore said. “[Power burn] is making a pretty big dent in gas supply, but, again, a lot of that is price driven. You need to keep a lid on prices to keep that phenomenon afloat.

“If prices rally to the $3.30 to $3.40 range, you would lose some of that demand,” he noted.

Bentek expects gas prices to be under pressure for the next couple of years, unless there’s a larger than expected demand response, for instance from industrial demand, additional coal plant retirements or increased exports to Mexico.

Erica Bowman, vice president of research and policy analysis for Washington, D.C.-based trade group America’s Natural Gas Alliance, anticipates storage levels to end the summer in line with predictions from the EIA.

In its short term energy outlook, the EIA predicted inventories will be below Bloomberg estimates at 3,919 Bcf by Nov. 1. That’s about 3.2 percent above the five-year average for that time.

“The weekly storage injections over the past four of the last six weeks have been below 2014 levels,” said Ms. Bowman. “We’re still injecting quite a bit of gas, but I don’t think we’re going to get beyond the 4,000 Bcf mark.”

“That kind of price level encourages power generators, which helps manage some of that storage,” she noted.