Natural Gas: Gross Gas Supply May Have Already Peaked for 2018

  • Natural gas storage is at record low levels but prices are falling going into winter heating season. Markets seem to be betting that wellhead supply will be sufficient to cover demand this winter. That may be but at what gas prices?
  • Natural gas 6-month calendar spreads moved in backwardation in early September and climbed to +$0.57 on October 9. Henry Hub reached $3.28/mmbtu but both spreads and price have fallen since then
  • Upward movement of prices and spreads were long time coming considering the massive storage deficit that began in October 2017. Current storage is -500bcf less than the 5-year average
  • Storage is an almost unbelievable -700bcf less than during the same time in 2017 and yet, markets are seemingly unfazed
  • October working gas in storage and projected monthly comparative inventory is lowest in history for October
  • On the other hand, the 2017-2018 increase in US production has also been the largest in history. Dry gas production has increased +14bcf/d over the last 20 months, an impressive +0.7bcf/d per month
  • That gas output surge has given markets comfort that wellhead supply may be adequate to compensate for the storage deficit during the coming winter
  • Gross gas supply (production minus exports) is not very comforting
  • LNG exports by tanker and pipeline exports to Mexico and Canada have been steadily increasing. Exports reached 3.25bcf/d in September and are projected to increase to almost 9.5bcf/d by November 2019
  • Result: despite growing production, gross gas supply may have already peaked and is on track to decline going into winter
  • It is unclear why markets are making what seems like such a risky bet on supply when history suggests a clearly negative outcome for price
  • November 2017 through April 2018 gas use was 16.5 tcf or 91.1bcf/d
  • That exceeds the previous Winter 2013-2014 record by 0.8 tcf or 4.3bcf/d. During that winter, weekly average HH prices reached $6/mmbtu
  • January 2018 gas consumption was a remarkable 107bcf/d
  • It is unlikely that US will have an overall gas shortage this winter but it is probable that prices will move higher as inventories are consistently drawn down
  • A normal winter will lead to short-term price spikes in local markets similar to what occurred last winter
  • History suggests that prices will almost certainly reach $4.00 to $4.25 weekly averages during the coming winter, and that much higher prices are possible

Art Berman – Natural Gas Risky Business: What, me Worry?

Image Source: EIA STEO, Labyrinth Consulting Services