Avoiding the Market’s Summer Burn
In new regional analysis, Drillinginfo looks at impacts to natural gas consumption from the power sector due to anticipated weather changes and fuel switching
Media Contact: Jon Haubert | 303.396.5996
Austin, TX (May 3, 2017) – In the latest installment of its market outlook series, the Fundamental Edge, Drillinginfo has released Summer Power Burn Outlook, a new market outlook report focused on gas power burn this summer.
Typically during summer months, natural gas demand from the electric power sector makes up a larger share of total domestic natural gas demand as compared to winter. Last summer, power burn represented 49% of the total natural gas demand consumed in the U.S.
While winter heating demand from the residential and commercial sectors is very price inelastic due to a lack of substitutes, summer cooling demand from the power sector is price sensitive. Grid operators have the flexibility to respond to changes in the pricing of input fuels by substituting coal and natural gas for one another.
The share of total power generation attributed to gas has been growing over the past several years due to changes in infrastructure, most specifically additions to power plant fleet fueled with natural gas and added transport capacity.
Although infrastructure developments over the past year should be a net positive for more natural gas consumption by the power sector, higher pricing (less fuel switching) and Drillinginfo’s assumption of more normal weather (5-year average) leads to a base case forecast of 27.6 billion cubic feet per day (Bcf/d), which is 2.5 Bcf/d lower than last summer which saw record high temperatures and significantly lower Henry Hub pricing.
The major risks to this market forecast are pricing and weather. Based on recent data, the weather scenario could alter Drillinginfo’s forecast within +/- 0.9 Bcf/d if all else is held constant. Drillinginfo’s Henry Hub forecast is $3.47 million BTUs (MMBtu) average for this summer. A $3.00 MMBtu average gas price increases the previous forecast by 1 Bcf/d, while a $4.00 MMBtu average reduces it by 0.9 Bcf/d holding all else constant.
Over the long term:
- Power infrastructure gains are expected to continue with natural gas power capacity set to add 18% over the next 5 years if all announced power plants are built. Coal would decrease by 5% over the same time period while wind and solar gain 71% each.
- As natural gas fleets gains efficiency and grow in size, the potential for price switching between natural gas and coal decreases.
- Drillinginfo’s regional analysis indicates that the PJM-East region is the fastest growing in terms of natural gas consumption by the power sector. This region accounts for 42% of the total U.S. natural gas power plants that have been proposed to be added. Texas follows with 28%.
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