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FERC staff present 2014 State of the Markets report

Published by
Hydrocarbon Engineering,

On 19 March, the Office of Enforcement’s Division of Energy Market Oversight presented the 2014 State of the Markets Report. The report is the staff’s annual opportunity to share their assessment on natural gas, electric, and other energy markets developments during the past year to better inform the Commission’s understanding of current and future trends.

Report highlights

Energy market overview

During 1Q14, extreme cold temperatures stressed the country’s natural gas infrastructure and power markets. US natural gas prices reached record levels resulting in electricity price spikes. After a dramatic start to 2014, natural gas and electricity prices were relatively low and stable for the remainder of the year. Despite low prices throughout most of the year, natural gas production continued to break records. Oil prices plunged during the second half of 2014, which has implications for oil and gas industry activity in 2015 and beyond. In 2014, there were significant developments in the organised markets, with major changes in CAISO and SPP, and the expansion of MISO. Electricity markets continue to adjust to a change in generation mix, as coal plants retire and new natural gas and renewable generation enters service.

Natural gas prices and demand

The spot natural gas price at Henry Hub averaged US$4.32 million Btu in 2014, 16% higher than in 2013. Prices were on average 14 - 43% higher at key hubs throughout the country, with the Chicago Citygate experiencing the highest increase. Although prices began to moderate in the spring, concerns about low storage inventories kept prices up until early summer. Prices fell in the fall as storage recovered, and by late December, the Henry Hub price was below US$3.00.

The 43% increase in the average price at the Chicago Citygate was a result of both the high price levels during the harsh winter, and of continued reliance on natural gas supplies from Canada. Canadian prices were 31% higher in 2014 than in 2013, as they recovered from an oversupply condition in 2013. In addition, natural gas demand in the Midwest in 2014 was the highest on record, up 3% from 2013. In contrast, the Northeast experienced some of the lowest year on year price increases, as the region benefitted from growing Marcellus Shale supplies.

On the back of the coldest winter in over a decade, average US natural gas demand for 2014 reached a new record of 70.7 billion ft3/d. Residential and commercial natural gas demand grew 3% in 2014, while industrial natural gas demand grew 2% as low prices of natural gas and natural gas liquids continued to fuel a renaissance in US industry. Despite the record cold winter, however, natural gas demand for electricity generation decreased by 0.5 billion ft3/d, or 3% from 2013 levels as the result of a cooler than normal summer.

Natural gas inventories

Massive replenishment of natural gas inventories took place in 2014. The injection season began in the spring with 822 billion ft3 of natural gas in storage, the lowest level since 2003. However, mild temperatures in the summer and fall, and steady increases in US natural gas production resulted in market participants injecting almost 2.8 trillion ft3 during the 2014 refill season, nearly 10% above the previous high. Inventories reached 3,611 billion ft3 by 1 November, the traditional end of the injection season, only 5% below the five year average. By the end of the year, inventories stood at 3,220 billion ft3, 8% above 2013 levels.

Despite strong natural gas withdrawals early in January and February of this year, inventories were 47% above 2014 levels by 6 March. Assuming average withdrawals between now and the end of March, inventories are poised to enter the injection season over half a billion ft3 above the same time in 2014, putting downward pressure on prices going into the summer.

Natural gas production

Natural gas production grew 5% in 2014, averaging 68.4 billion ft3/d and breaking the record set in 2013. Two shale formations, the Marcellus in Pennsylvania and the Eagle Ford in Texas, accounted for 34% of the production increase, averaging 14 and 4 billion ft3/d respectively. Crude oil prices fell from US$115/bbl in mid June to US$53 at the end of December, reducing drilling activity in the latter half of 2014. However, natural gas production continued to climb. There is concern that prolonged low crude oil and natural gas prices could result in slower growth or even a decline in natural gas production. However, year to date production has consistently remained above 71 billion ft3/d, and by the end of February, it was on average 6.4% higher than in the first two months of 2014. A backlog of uncompleted wells could help maintain production levels in the near future. As of the middle of January, there were approximately 1100 uncompleted wells in Marcellus.

For more information, read the 2014 State of the Markets report in full here.

Adapted from report by Rosalie Starling

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