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NGSA outlook sees 'flat pressure' on US prices as production helps offset record demand, lower storage

Highlights

Demand up in every category

Weather largest determinant in forecast

Washington — The Natural Gas Supply Association anticipates lower storage levels will be countered by soaring production this winter, resulting in neutral pressure on wholesale natural gas prices, despite record domestic consumption this winter.

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NGSA on Wednesday released its winter outlook, which evaluates the combined impact of weather, economic growth, customer demand, storage, supply and "wild card" factors on prices winter over winter. Overall, it said a flexible, stable marketplace is likely despite consumer demand exceeding the extremely cold winter of 2013-2014.

The outlook anticipates a record demand of 102.7 Bcf/d, mostly tied to an increase in electric sector and industrial use of gas, as well as exports, combining to add 3.4 Bcf/d, on average, to consumption.

On the supply side, lower storage inventories at the start of the winter -- 3.3 Tcf versus about 3.8 Tcf last winter -- were seen as exerting upward pressure on prices this winter compared with last. In contrast, offering downward pressure, production this winter was forecast to average 84.9 Bcf/d, up from 77.4 Bcf/d last winter.

STORAGE VERSUS SUPPLY

"You've got a flowing supply that can directly go to market that will reduce the need to draw on storage," said Donald "Blue" Jenkins, vice chairman of NGSA and chief commercial officer of EQT. "I think we're going to learn a lot about how flowing supply and storage interface with one another and how the market gets comfortable with that moving forward."

A key caveat is "how does the winter show up," he said. For instance, cold in the front end of the season that requires an early storage draw could affect thinking in the first quarter, while a warmer start would make the market more comfortable headed into January and February.

Jenkins added that "storage is a regional conversation." Having 3.7 Tcf in storage does not preclude regional disruptions, particularly in places that haven't invested in infrastructure to resolve winter peaks. New England and California still have the potential to be "a bit more volatile," he said.

Demand was up in every category, Jenkins noted, with electricity demand forecast to reach a record 24.8 Bcf/d.

"We've seen a lot of structural changes in that market share as we turn off coal plants and we turn on new gas-fired plants," he said, noting that in the industrial sector, "we're seeing there is a higher utilization of assets than we've seen in the past."

The outlook considered that demand factors exert neutral pressure overall on prices. LNG exports, at 4.7 Bcf/d, were forecast to average 57% above last winter's level, but still make up only 5% of the 2018-2019 winter demand.

WEATHER 'WILD CARD'

Weather is the largest determinant in the forecast, Jenkins said. Temperatures are forecast to be 1% warmer than last winter, exerting neutral pressure on prices.

In general, Jenkins said that since the shale revolution, the price spikes that occur are fairly rare and short in duration, with a lower absolute price impact than in the past.

Weather is the single "wild card" element in the forecast, he said.

"Storage and supply dampen a lot of those wild card effects. When you have 8 Bcf/d of incremental gas flowing every day, the shocks of some of that weather are muted a bit," he said.

The overall economic factors are "on that cusp between neutral and positive," Jenkins said, with GDP growth forecast this winter at 3.2%, compared with 2.5% actual growth a year earlier. NGSA for the first time included world GDP growth, (3.3% this winter versus 3.2% last winter), in a nod to the increased role that industrial sector exports and natural gas exports play.

Jenkins injected a note of caution on future industrial and export growth, saying "there is uncertainty that we're introducing with some of the tariff commentary and other things."

"I do worry most of these investments are targeting at an international marketplace. What I would hate to see is three winters from now or five winters from now ... we have much lower numbers because we didn't get it quite right now. The current outlook highlights $79 billion in industrial investments, leading to 2.1 Bcf/d of increased demand by 2023.

As to last year's outlook, Jenkins said the NGSA forecast of "flat pressure" last year was on target, as prices moved only about 2 cents between the two winters.

The outlook is based on publicly available data and independent analysis.

-- Maya Weber, maya.weber@spglobal.com

-- Edited by Annie Siebert, newsdesk@spglobal.com

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