The U.S. natural gas market is carrying about an 850-Bcf surplus in storage versus last year and the 5-year average. But it looks like the surplus will finally start to contract in earnest over the next few weeks. So the big question is -- will it be fast enough to prevent crippling supply congestion by this fall? With Canadian storage inventories also high and U.S. gas production still averaging slightly higher than last year, it seems record demand will be needed to bring storage into balance. Today we look at the prospects for demand this summer to trump last year’s record demand.
This is Part 4 of our natural gas supply/demand and storage update series, “Carry That Weight.” In Part 1 we looked at the 2015-16 winter supply/demand balance, which showed that an exceptionally mild winter resulted in modest demand through what are typically the highest demand months of the year, and that this occurred even as production was reaching new highs. This only exacerbated the surplus in storage, leaving the market nearly 6-Bcf longer than the previous winter. That imbalance in turn suppressed withdrawals from storage and left the market with a record-high storage overhang by the start of the 2016 injection season (April 1 to October 31). In Part 2 we then looked at how the enormous storage overhang would impact storage activity in the 2016 injection season: essentially that injections into storage will need to be consistently below what they have been historically in these months if the market is to prevent a storage capacity shortage (and further price discounts) by fall 2016. And that will require supply/demand to tighten relative to recent years, either due to lower supply or higher demand or some combination of the two.
In Part 3 we began a look at the various fundamental factors at play this summer that could help or hinder that process of grinding down the surplus through the injection season. We started by examining the supply side, including the two biggest supply drivers – U.S. production and Canadian imports, using data from our friends at IAF Advisors (formerly Criterion Research). In the past two months, production has retreated in from the record highs seen in February (2016), but the declines were largely stemmed from short-term maintenance or weather events, such as the flooding in Southeast/Texas region and the rupture on the Texas Eastern’s Penn-Jersey line that occurred on April 29 (2016). Despite these disruptions, production has averaged higher than last year, however. This April, production averaged 72.9 Bcf/d, 0.2 Bcf/d higher than in April 2015. And the temporary nature of the recent declines suggest the possibility of higher production once maintenance and repairs wrap up. Additionally, high Canadian storage inventories point to increased gas-on-gas competition between U.S. and Canadian supply that could result in higher Canadian imports into the U.S. As we noted last time, Canadian imports this April averaged 0.3 Bcf/d higher year over year. (Note that at this point we have not assessed the potential impact of the tragic Fort McMurray fire; the demand for natural gas to produce steam for oil sands crude in the region will likely be reduced for some period of time.)