Pinnacle Activity Ticker
Natural Gas at $8: Not Anytime Soon
Despite the positive sentiment of many investors at Pinnacle and around the world (in regards to natural gas), supply levels remain daunting and could put a halt to the long awaited recovery in natural gas prices. The Energy Department reported that natural gas in storage grew by 26 billion cubic feet to 3.189 trillion cubic feet for the week ended July 20. This was 15.8% above the five-year average of 2.754 trillion cubic feet, and 18% above last year's level. Not good news if you are a natural gas bull.
EconMatters argues that no matter how extreme the heat wave, $8 natural gas will not happen in 2012. Natural gas hit a 10-year low of below $2/mmbtu in April. Since then, Henry Hub benchmark prices have surged 69%, hitting $3.214/mmbtu on Monday, July 30 - the high of the year.
Despite increased usage and demand, due to higher expected temperatures, the cheap natural gas prices have also attracted many utilities to switch from coal to natural gas for power generation. This is where growth will have to come from in the future if America is to become more energy independent.
The combination of these positive indicators has prompted at least one article at Forbes predicting $8.00/mcf natural gas by "the approaching winter". This would be another 160% rise in about four months. Although this is very unlikely, it cannot be denied that the demand fundamentals are beginning to line up for natural gas.
The EIA raised its estimate for domestic natural gas consumption this year, expecting demand to climb 3.3 bcfd, or 4.9%, from 2011 to 69.91 bcf daily (driven mainly by a 21% jump in coal-to-gas switching for power generation in 2012).
Note: If $4 natural gas, or higher, becomes a reality, we have to believe much of its new consumption demand will switch back to the cheaper energy sources, such as coal.
EconMatters believes we will see the Henry Hub continue to hover within the $2-$3/mmbtu range in the next twelve months "barring a super-sized hurricane knocking out production in the U.S. Gulf".
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