uploads///POWER GEN

Power Generation Rises, Supporting Natural Gas Demand

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Natural gas consumption for power generation

According to data released by the EEI (Edison Electric Institute), 88,003 GWh (gigawatt-hours) of electricity was generated in the United States during the week ended July 17. This was ~4% more than the 85,046 GWh generated during the week ended July 10. The increased electricity generation has also been driving natural gas consumption for power generation, as we saw in the previous part.

On a year-over-year basis, the United States generated 6% more power in the week ended July 17 compared to the corresponding week in 2014.

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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 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 iShares U.S. Energy ETF (IYE).

Short-term trends

According to the EIA (U.S. Energy Information Administration), a total of ~669 bcf (billion cubic feet), or ~22.3 bcf per day, of natural gas was consumed for the purpose of electrical power generation in April, the latest month for which data is available from the EIA. It’s interesting to note that, of the ~2,044 bcf delivered to end users in April, electricity generation accounted for the most, at ~33%.

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The National Oceanic and Atmospheric Administration has projected that, in the United States, there will be 7.3% more hot days requiring more cooling between June and August than in the corresponding period last year. Higher temperatures should lead to greater power consumption and should boost demand for natural gas. In turn, this effect should boost prices. This would benefit the natural gas producers we mentioned above.

Long-term trends

According to the EIA, coal consumption in 2015 is expected to fall 7%, fueled by lower natural gas prices. The EIA forecasts that the share of coal-fired electricity in terms of overall power generation will average 35.6% in 2015 compared to 38.7% in 2014. In contrast, natural gas should account for an average 30.9% of power generation this year, up from 27.4% last year.

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