A broad natural gas market shift driven by strong demand from a growing number of sectors could create a more bullish price environment for natural gas this winter and going forward, market analysts said.
The natural gas inventory rebuilding efforts ended Oct. 31 with 3,790 Bcf of natural gas in underground storage facilities, which was below both the record season-ending level of 4,009 Bcf in 2016 and the five-year average level of 3,861 Bcf.
The impact of the supply deficit on the price of natural gas this winter will depend on the level of demand for natural gas, predominantly from the residential and commercial sectors.
A look at historically cold and mild winters indicates how the market responds to weather.
The winter of 2015-16 went down as the record warmest winter in U.S. history. Under the mild weather, demand for natural gas during the peak period from December 2015 through February 2016 crumbled and the Henry Hub natural gas spot price responded with a peak value of $2.54/MMBtu on Jan. 11, 2016, and a low at $1.49/MMBtu on March 4, 2016.
Comparatively, the winter of 2013-14 was one of the coldest winters in U.S. history. During that season, demand surged and the Henry Hub spot natural gas price reached a peak of $8.15/MMBtu on Feb. 10, 2014, and notched a low of $3.84/MMBtu on Dec. 4, 2013.
The latest weather forecast for the 2017-18 winter heating season suggests conditions somewhere between the two extremes.
For December 2017 through February 2018, the National Oceanic and Atmospheric Administration on Nov. 16 outlined a 40% or better chance that above-normal temperatures will prevail across much of the country, including the East Coast, the Southeast, the West Coast and areas of the south-central U.S.
The Weather Company forecasts similarly outline warmer-than-normal weather for the southern half of the U.S., especially the Southwest, for December 2017 through February 2018, with slightly below-normal temperatures across most of the northern half of the country.
Under the relatively mild winter scenario, natural gas prices could face significant downside pressure during the heating season and well beyond as the natural gas inventory fails to draw down at an average pace ahead of the next injection season, but analysts warn that the market is shifting.
"The market is setting up for a tug of war between demand growth and technical evolution," ICF Vice President Kevin Petak said during a Nov. 14 market call.
"The weak prices we have been seeing have been the result of a supply push," Petak said. Supply is growing robustly as productivity continues to rise despite lower drilling levels, Petak said. However, drivers are in place to shift the gas market from a "supply-push" to a "demand-pull" environment, he said.
This reversing trend has been evidenced by a shift higher in the residential and commercial Bcf/heating degree day ratio.
The past two winters saw a shift higher in the RnC Bcf/HDD ratio, from a 1.48 five year average to 1.50 and 1.53 averages over the past two winters, respectively, Barclays' analyst Nicholas Potter said in a Nov. 16 research note.
"This ratio effectively indicates that since 2000, on average, every HDD (Nov-March) has created between 1.40 and 1.53 Bcf of residential and commercial demand," he said.
If this represents a structural move higher in the ratio, the market could be underestimating residential and commercial gas demand this winter, which could be bullish for prices, the analyst said.
In addition to residential and commercial demand, a growing appetite for natural gas to liquefy for exporting is expected to drive total demand higher in the winter and beyond.
LNG exports from the Gulf Coast will lead the way to more than 9 Bcf/d of LNG gas exports by 2025, while pipeline exports to Mexico will reach a total of 6 Bcf/d by 2025, Petak said.
Natural gas production, however, will counter the rising demand.
"We forecast 2017 production exit rates to hit 75.4 Bcf/d, up from 70.4 Bcf/d in December 2016. Winter 2017-18 (Nov-Mar) production should average 75.6 Bcf/d, up from just 70.4 Bcf/d last year," Potter said.
Taking the longer-term view, Petak said that by the middle of 2018, there will be a greater rebound in drilling activity. The analyst sees total gas production approaching 98 Bcf/d by 2025.
Although U.S. natural gas inventories will enter the upcoming winter heating season below the five-year average for the first time since 2014, which should help support prices, record gas production growth will likely keep the market from getting overly bullish, Potter said.
Assuming normal temperatures, Barclays sees the market adequately supplied by existing storage levels and increasing production.
"Colder-than-normal temperatures or lower production levels would provide the most likely upside scenario for prices while another mild winter would be the most likely bearish outcome," Potter said.
In its base case scenario, Barclays forecast 2018 prices to average $3.19/MMBtu, slightly higher than the current futures curve, which is at $3.09/MMBtu.
Henry Hub will average $3/MMBtu over the next 12 to 24 months, Petak said.
Prices will be modestly higher during the next decade, but Petak does not expect a sea change. Prices will remain relatively low, he said, generally averaging between $3.00/MMBtu and $4.00/MMBtu over the next five years.
By comparison, in its latest "Short-term Energy Outlook" released Nov. 7, the U.S. Energy Information Administration projected that growth in exports and domestic natural gas consumption in 2018 will support an average 2018 Henry Hub spot price of $3.10/MMBtu.
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