How Did Prices React to Rising Natural Gas Inventories?
(Continued from Prior Part)
Power generation
According to data released by the EEI (Edison Electric Institute), the US generated 88,044 gigawatt hours of electricity during the week ended August 14. That’s 0.75% less than the 88,711 gigawatt hours generated during the week ended August 7.
Also, as we saw in the last part of the series, natural gas demand from the power sector increased last week. So it’s likely that we could see an upward tick in power generation for the week ended August 21. Watch Market Realist for our report next week. On a year-over-year basis, the United States generated ~5.5% more power in the week ended August 14 compared to the corresponding week in 2014.
Natural gas versus coal
Since electricity generation companies depend mainly on coal or natural gas to generate electricity, increased electricity generation is likely to boost demand for coal and natural gas. This would be positive for both coal and natural gas producers.
However, given that natural gas is a cleaner fuel and that it’s abundant, it’s expected to take market share away from coal in the long term. This would be bullish for natural gas prices and natural gas producers such as Devon Energy (DVN), Southwestern Energy (SWN), Range Resources (RRC), and QEP Resources (QEP). These companies make up ~3% of the Vanguard Energy ETF (VDE).
Short-term trends
According to the EIA (U.S. Energy Information Administration), a total of ~736 Bcf (billion cubic feet), or ~23.7 Bcf per day, of natural gas was consumed for the purpose of electrical power generation in May, the latest month for which data is available from the EIA. It’s interesting to note that, of the ~1,878 Bcf delivered to end users in May, electricity generation accounted for the most at ~39%.
The National Oceanic and Atmospheric Administration has projected that weather conditions will moderate in the second half of the summer, which could decrease power consumption. This would add to expanding natural gas storage and put downward pressure on prices. However, the EIA believes this could be offset by the addition of natural-gas-fired electric generation capacity and the retirement of coal-fired capacity. The EIA says there will be 4.3 megawatts in scheduled capacity natural gas additions this year. Also according to the EIA, 13 gigawatt hours of coal-fired generation capacity will retire this year.
Long-term trends
According to the EIA, coal consumption in 2015 is expected to fall 7%, fueled by lower natural gas prices and increased electricity generation based on renewable energy. The EIA forecasts that the share of coal-fired electricity in terms of overall power generation will average 35.6% in 2015, down from 38.7% in 2014. In contrast, natural gas should account for an average 31.2% of power generation this year, up from 27.4% last year.
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