This was copied & pasted from another companies website I own in, I just thought some may be interested to read it being that this directly pertains to ARH as well.
Author: Peter Tertzakian, Calgary Herald
These days watching North America’s natural gas industry is like wandering through a living economics laboratory; an industry theme park where inhabitants adapt to change. This week, a couple of remarkable charts demonstrate more extremes that have developed in this corporate ecosystem. An unusually warm winter has led to swollen natural gas stores and ultra-low prices, which in turn has been luring a surprising herd of electricity-generating customers. Nature, in a capitalist sense, seems to be working to remedy the imbalance of oversupply.
Witness Figure 1, a W-shaped consumption pattern. Each line traces weekly natural gas usage by US power utilities in a labeled year. Week-to-week chatter varies in each line, but the historic patterns are mostly predictable with the seasons: modest amounts of natural gas consumed in the winter months; much less in the low-demand spring and fall seasons; and a lot in the peak of summer when the discomfort of sweat calls on the air conditioners.
Yet Figure 1 shows that this year’s natural gas consumption (blue 2012 line) isn’t retreating, as we would expect when heading into spring. Over the past six weeks, power generators have been using an average 6 Bcf/d more than normal. Going back to the beginning of the year, an average 4.3 Bcf/d of incremental volume has been burned relative to 2011. While this deviation from the normal winter-to-spring declining pattern appears unusual, it does rationally coincide with the collapse of natural gas prices to giveaway levels (the economics lab works). In the past six weeks, the price of an MMBTU has dropped 17%, from $2.50 to $2.07. So instead of being a seasonal supplier of fuel to power generators, natural gas appears to be taking on more of a steady role as it becomes a cheap substitute for the likes of coal.
But one thing is bothersome: why is this substantial incremental burn not depleting inventories? All else being equal, storage levels should have fallen this year by about 325 Bcf (76 days to March 16, multiplied by 4.3 Bcf of extra daily power demand).
Our second remarkable chart explains what is going on: While significantly more natural gas is being burned to make electrons, far less is being combusted to make warmth. In the real ecosystem called our climate, one of the mildest January-February-March months on record has drastically cut heating demand.
Figure 2, “Implied Natural Gas Demand for US Heating,” gives a sense of the heating demand drop; an average 8.0 Bcf/d less natural gas has been used to stoke furnaces year-to-date 2012, compared to 2011. These bipolar anomalies between what’s not needed for heating, and what more is being used to generate electrical power, represent the offsetting forces that explain why storage inventories have ballooned out over the late winter months.
Looking ahead, heating demand will go to zero in a few weeks, as it predictably does every year around April. With US natural gas trading in the low-$2.00/MMBTU range, power generators are unlikely to shed their new found love for natural gas, and will be ramping up to use more when the continent’s air-conditioning units start spooling up.
Yet the extreme reality is that natural gas stores are a monstrous 800 Bcf above normal coming out of winter. Historically, one or two hundred above par ould have been enough to write off price expectations for the rest of the year. So, understandably, natural gas markets continue to embrace a deep bearish sentiment toward this orphaned commodity.
But extreme conditions elicit extreme responses in free markets. All else being equal, an extra 6.0 Bcf/d of power demand could (emphasis on “could”), if sustained, wipe out excess stores in approximately four months, around the end of summer. And we know that all else is not equal, because there is also a herd of North American drilling rigs abandoning their natural gas habitats, stampeding toward lush oil plays, away from the miseries of a cash drought (see for example, Calgary Herald Blog Post, March 5, 2012). Production should be flat at best, possibly starting to wane.
Everything about natural gas fundamentals in North America – supply, demand, seasonality, storage and price – is now extreme. Resolution of all these imbalances will be forthcoming. It’s like the Wild Kingdom of free-market behavior at its best.