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Power-sector demand seen as key to balancing gas market after mild winter


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Power-sector demand seen as key to balancing gas market after mild winter

A tighteningof the natural gas supply/demand balance and thus, a substantial improvement inprices, will be difficult without a ramp up in residential/commercial-sector demand.

The importanceof residential/commercial sector consumption can be evidenced in the that reached anear record high level of 2,468 Bcf a week before the final storage tally from theU.S. Energy Information Administration for the titular withdrawal season. The keysector, which depends heavily on weather, has seen contraction in consumption since2014, according to U.S. Energy Information Administration monthly data.

Monthlynatural gas consumption in the residential sector peaked in January 2014, hitting1,037,156 MMcf as a result of the polar vortex winter. Since reaching the peak,comparisons show natural gas usage down month on month for every month from 2014through January 2016, save for February 2015, which was especially cold.

Similarly,commercial-sector consumption peaked at 571,795 MMcf in January 2014 and, save forFebruary 2015, compared lower for every month from 2014 through January 2016.

Residential/commercial-sectordemand is largely driven by weather and particularly by the winter cold that pushesup the need for heating. Demand for the winter 2015/16 was made shallow by the warmestwinter on record.

"Wejust left behind the warmest winter the US has ever experienced," analystswith Bank of America Merrill Lynch Global Commodities Research said in a March 31note. "Looking at the number of heating degree days, America recently hit alow 12 HDDs, a figure more typical of late April than early March."

Overall,this winter turned out to be 2.8 standard deviations warmer than the historicalaverage, while the 2011/12 winter was 2.7 standard deviations above the average,according to the analysts.

In itsfinal first-quarter heating degree days analysis released on April 6, Williams CapitalGroup said heating degree days recorded in the first quarter, the most importantfor the natural gas markets, were lower than normal throughout most of the importantheating regions of the U.S. with composite heating degree days only about 88.3%of normal.

The analysisshowed January heating degrees rebounded from a very warm fourth quarter of 2015to 96.4% of normal. However, February and March were sequentially warmer. FebruaryHDDs were only 89.6% of normal while February HDDs were only 73.9% of normal. "Luckily,March only represents about 25% of the heating degree day for the first quarter,"the Williams analysts said.

"Moreimportantly, the year-to-year comparison will be particularly unfavorable. Year-to-yearheating degree days were significantly lower overall, with more disparity of resultsacross the regions than in Q415, yet with only 17 of 62 sample cities recordingtemperatures colder than Q115, most of which generally have fairly insignificantfirst quarters for heating. Not one U.S. sample city recorded temperatures at normalor colder than normal in Q116."

Firstquarter 2015 heating degree days were 104.8% of normal. As a result, heating degreedays declined 15.8% year on year for the 2016 period. The largest departure fromnormal heating degree days was in the California, Southwest, Gulf Coast and Texasregions. More than half of cities sampled by the Williams analysts saw year-on-yeardeclines of more than 15% compared with the first quarter of 2015.

Amida lack of residential/commercial-sector demand, the power sector has been calledupon to carry the demand side and pull the natural gas market out of the doldrums.

"Gaspower demand continues to do the heavy lifting in balancing an oversupplied gasmarket," Morgan Stanley analysts said.

Naturalgas electric power demand for January was at a seasonal record of about 25 Bcf/d,up about 2 Bcf/d year on year, with cheap gas prices helping to drive strong coal-to-gasswitching. Pipeline data since January suggest incremental gains have held, andeven accelerated in some regions, as Henry Hub cash prices retreated to lows of$1.50/MMBtu in March, analysts with Morgan Stanley said.

"Theselow prices began displacing even the cheapest PRB coal in Texas and the Midwest,"the analysts said.

But theelectric-generating sector could be running out of steam and may not have enoughenergy to carry the market going forward.

"MostUS regions that could switch out of coal on economic terms have already done so,"Bank of America Merrill Lynch analysts said.

Furtherthere have been some concerns over high power-sector coal stockpiles, which, asof December 2015, were well above normal, Barclays analysts said in a weekly reportissued April 4.

"Thefear at least for the gas market is that this may result in out-of-merit burningof coal to diminish stocks, which would lower gas burn," the Barclays analystssaid.

Additionally,April is also set to be the peak month for 2016 coal retirements, with 2.8 GW expectedto retire, compared with 5.9 GW for the full year. "Given their impending retirements,these plants could ramp up utilization ahead of closure, potentially lowering powerburn (54% of April retirements are in the Mid-Atlantic, with 31% in the Southeast),"the analysts noted.

AfterApril, gas should be able to gain some ground, Barclays said.

The naturalgas price has broken down through the winter heating season posting the lowest settlementin 17 years at $1.639/MMBtu on March 3. Natural gas futures regained some ground,but the market continues struggling below the $2/MMBtu resistance level, attemptingto hold above the mark but reversing gains, with its latest settlement at $1.911/MMBtu.

Summercooling demand will keep demand from the power-generating sector strong, but goingforward, the market will look for demand-side boosts from growth in pipeline exportsto Mexico and LNG exports to other regions to help rebalance the market leadingup to what is expected to be a colder winter that should reinvigorate residential/commercial-sectordemand.

"Overall,we see a proper rebalancing of the US natural gas market at the beginning of the2016/17 winter and expect prices to bounce back to $3.10/MMBtu by the end of theyear," Bank of America Merrill Lynch analysts said.

Whilethe analysts see an inventory drawdown of roughly 2.2 Tcf next winter and expectend-of-winter stocks to stand at 1.7 Tcf next spring, a deficit versus the five-yearaverage, the Bank of America analysts warned that most weather forecasters currentlysee a 40% chance of La Niña developing by the third quarter, rising to 50% by thefourth quarter.

"Avery strong La Niña effect would result in a hotter than normal summer and may pushNYMEX nat gas to $2.75/MMBtu by July, but La Niña would also act as a dampener onwinter prices and may prevent a price recovery in 2017," the analysts said.

Market prices and included industrydata are current as of the time of publication and are subject to change. For moredetailed market data, including our power,naturalgas and coalindex prices, as well as forwardsand futures,visit our Commodities Pages. To view detailed EIA Weekly Natural Gas Storage data,go to our NaturalGas Storage Page.