Monday, April 3, 2017

"U.S. Natural Gas Supply/Demand Scenarios for Injection Season"

The up move does appear to have some legs:

$3.230 last, up 0.0420

From RBN Energy:

You Keep Me Hangin' On - U.S. Natural Gas Supply/Demand Scenarios for Injection Season
After exceptionally mild weather nearly derailed the U.S. natural gas market earlier this year, the gas supply/demand balance is set to end the 2016-17 withdrawal season relatively bullish compared to last year. Storage is finishing the season more than 400 Bcf lower than last year, albeit still 260 Bcf/d above the 5-year average. In addition, gas exports are continuing to ratchet higher. The April 2017 CME/NYMEX Henry Hub natural gas futures contract expired Wednesday (March 29) at $3.175/MMBtu, nearly $1.30 (67%) higher than the April 2016 contract settlement of $1.90/MMBtu and also about 55 cents higher than the March 2017 contract settlement. Yet, with the storage inventory still higher than the 5-year average and production growth on the horizon, the market remains susceptible to downside risk if incremental demand doesn’t show up. In today’s blog, we look at potential supply/demand scenarios for injection season.

The U.S. natural gas market exited the first quarter of 2016 from one of the most bearish winters on record, with more than an 800-Bcf “surplus” in storage compared to the 5-year average, about 1,000 Bcf more than the prior year, and gas prices depressed below $3.00/MMBtu. Nevertheless, by the end of the year, the market had not only managed to wipe out the surplus versus both the prior year and the 5-year average but also ended up net short supply on average for the year and prices were approaching $4.00/MMBtu. Both the supply and demand sides of the balance equation contributed to this remarkable shift. In 2016, total supply including imports averaged 77.5 Bcf/d, down 1.3 Bcf/d from 2015. Total demand including exports averaged 78.5 Bcf/d, up 1.3 Bcf/d year on year. So the resulting net balance (supply minus demand) went from positive 1.6 Bcf/d in 2015 to negative 1.0 Bcf/d in 2016. In other words, the gas supply and demand balance ended up averaging 2.6 Bcf/d “shorter supply” in 2016 versus 2015. We walked through each component of the 2016 balance in “You Keep Me Hanging On” Part 1, but here’s a brief recap of the biggest drivers:

On the supply side, U.S. gas production in 2016 fell a whopping 1.8 Bcf/d, posting its first year-on-year decline of the decade. Lower rig counts finally caught up to producers who had until then managed to maintain or grow production by drilling better and faster with fewer rigs, while capacity constraints out of the Northeast also contributed to growth flattening out there. Tightening the balance further was the fact that demand rose about as much as production fell. While mild weather stunted residential and commercial heating demand earlier in the year, just about all other gas demand climbed—to record levels in many cases—spurred on by lower prices and export capacity additions. A stand-out was the rapid rise of new demand from LNG exports, which ramped up for the first time in February 2016 and quickly grew to more than 1.0 Bcf/d by the end of the year (see ”Feels Like the First Time Part 1” and Part 2).

Given the balance, 2016 ended on a rather bullish note and prices seemed to be on their way to the $4.00/MMBtu level for the first time in two years. That didn’t last long.  Beginning in January, any bullish sentiment was squashed by an extremely mild first quarter of 2017, which turned out to be even milder than 2016. But the bulls have hung on nevertheless. While prices have long retreated from the $4.00 mark, they’ve remained more than $1.00/MMBtu above year-ago levels. That’s because the same bullish balance that helped prevent storage constraints in 2016 market is still lurking under all of that mild weather. When we last looked at the 2017 supply and demand balance in Part 2 of “You Keep Me Hanging On” in late February (2017), the market was 3.5 Bcf/d longer supply this year to date versus the same period in 2016. While supply was averaging 3.1 Bcf/d lower—led primarily by lower production—demand was down even more—an astonishing 6.6 Bcf/d year on year—resulting in the extremely bearish balance of 3.5 Bcf/d. But when we substituted the 2017 residential/commercial demand (res/comm) volumes for January and February with 2016 or five-year average res/comm volumes for the same period, we saw a very different balance—one that was short supply by close to 2.0 Bcf/d, respectively. In other words, when we stripped away the bearish effects of weather and assumed even average weather, the supply/demand balance easily flipped from net bearish to net bullish.

Moreover, since late February, weather has turned less bearish, and that underlying bullishness is now more apparent. If we look at the year-to-date balance now, for instance, we can see that it has shifted from being 3.5 Bcf/d long supply back in February (2017), to now very slightly (0.1 Bcf/d) short supply, and this happened within a month’s time. If we look at the withdrawal season as a whole (from November 2016 through March 2017), the market averaged 3.0 Bcf/d shorter supply compared to the same period in the prior year. What that’s meant for the storage inventory is that withdrawals have been strong enough to leave the inventory lower than where it was this time last year, despite starting this past winter at a record high....MUCH MORE
March 31
Natural Gas: EIA Weekly Supply/Demand Report
March 27  
Natural Gas: EIA Weekly Supply/Demand Report
If (big if) natty can get through the little gap at $3.20 there's not much technically to stop it up to the bottom of the big gap at $3.80, with $3.60 a minimum target....