At first glance, you might think this is a stretch. How can snowpack levels in the West possibly have anything to do with the price of natural gas nationally?It turns out that Rocky Mountain snowfall has a huge impact… Resulting water runoff from the thawing period changes the capacity of hydropower on the West Coast… and that has a huge impact on natural gas demand.

Plus it varies greatly from year to year.

First, snowpack levels have varied greatly between 2010 and 2011. This past winter was a good one for snowbirds who frequent Western ski areas. It still is. Take a look at the western states’ mountain snowpack levels on the chart to the right.

Both charts depict the snowpack levels across the western states as of May 1, 2011 and the year before. The colors represent the percentage above or below the 30-year historical averages. The darker the pattern, the higher the average snowfall percentage over the 30-year average.

You can clearly see that the 2011 snow levels remaining are significantly higher, with many regions up more than 180 percent (note the purple areas). Sure, it seems like it’s a great time to hit the slopes, but what does this have to do with natural gas prices?

Snowpack and HydroPower Generation to Hit Record Levels

A lot, actually. With snowpacks at record levels in many states, hydropower generation will hit record levels this year, as well.

• According to National Weather Service forecasts, water volumes through September at Grand Coulee Dam in Washington State will be the highest in nine years.
• Hydropower generation in the Pacific Northwest will amount to 105 billion kilowatt-hours in 2011.
• That’s an 8.5 percent increase from the 96.7 billion generated in 2010, according to the Department of Energy.

That will steeply cut demand for natural gas-fired electrical generation. Bloomberg recently reported that Credit Suisse Securities (USA) believes that hydropower may displace as much as 1.5 billion cubic feet per day of natural gas consumption through July.

That’s enough power to operate every gas-fired power plant in both Oregon and Washington. In the same article, Barclays Capital also predicted that natural gas prices could slip another 12 percent in the second quarter.

And it could get even worse for natural gas producers, who’ve watched prices fall for four consecutive years.

The Bonneville Power Administration based in Portland, Oregon says it may even give some power away for free. That would cause some coal- and gas-fired plants to reduce or completely shut down, at least until prices recover.

Lower Demand for Natural Gas as Storage Supplies Swell

The flip side of the equation isn’t good news, either. Domestic supplies have reached record levels due to huge increases from shale gas production. As you can see from the graph below, natural gas in storage took a big jump from 2009 forward as shale gas supplies came online.

This has natural gas storage injection rates and storage volumes at record levels. As you can see from the following graph, the Energy Information Administration predicts that 2011 will be the largest gas injection season since 2003.

Natural Gas Destined for Low Prices Due to Hydropower Competition

So with an abundant source of supply, record storage levels and now lower demand in some western states due to hydropower competition, some analysts feel that natural gas prices are destined to remain at low levels for the next three or four years.

• On the other hand, the overall power that’s being generated by natural gas is on the rise.
• Lower prices make it even more attractive to displace dirty, coal-fired plants with natural gas.
• The DOE reports that natural gas generated 24 percent of the power in the United States in 2010, up from 19 percent in 2005.
• Short-term, however, prices for natural gas will remain at record-low levels. (Where are all those natural gas-powered cars and trucks when we need them?)

It’s somewhat ironic – and a testament to the power of the oil lobby – to be paying near-record gas prices at the pump, when we have such an abundance of a cleaner-burning fuel right under our noses.

Good investing,

by David Fessler, Investment U‘s Energy and Infrastructure Expert

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