Natural Gas Supply Concerns Driving Up Prices

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• Natural gas prices are surging as summer gets underway. Utility demand for natural gas usually peaks during the summer, but supplies this year are in question.

• While increasing crude oil prices have probably helped to move natural gas prices higher through March and April, the latest May surge seems to be stemming from a confluence of factors raising concerns over the ability of supply to meet the peak summer demand days this year. The concerns center on:
  • A hot summer being expected this year;
  • A larger share of power generation using natural gas -- especially with the addition of some new merchant power plants expected to be in service this June;
  • The hurricane season beginning, which affects natural gas production;
  • Overall demand growth eating into excess deliverability;
  • Natural gas inventories lower than last year, and, while not at record absolute lows, providing less coverage as measured in days of supply.

• Ironically, an important alternative fuel for the electric generating companies is distillate fuel oil. If natural gas prices remain high, utilities may use more distillate this summer, hindering a buildup of heating oil stocks for the winter.