The U.S. natural gas market has been dogged all summer by uncertainty on both sides of the supply-demand equation and a looming threat of storage constraints and supply congestion by the end of the gas storage injection season. But production volumes have flattened and demand has responded at record levels taking some of the edge off the bearish sentiment. Cash and futures prices at U.S. benchmark Henry Hub in Louisiana have traded in a remarkably tight 60-cent range all summer and averaged $2.75/MMBtu season to date, indicating the market has found an equilibrium. However with just two months of the natural gas summer season left and the hottest, highest-demand months behind us, the price stalemate may come under pressure, with more downside risk in the near-term. In today’s blog, we revisit where the supply-demand balance stands and what it tells us about where the gas market is headed in the near term.
Our last update on the natural gas market supply demand balance (based on data from our friends at PointLogic Energy) was in early July 2015 (see “Tightening Up? Natural Gas Demand Response Emerging”). At that time, dry gas production increases had flattened to a level around a 2.0 Bcf/d above year-ago, and a robust demand response nearly 5.5 Bcf/d above 2014 looked to be emerging from the power generation sector. Total demand including the industrial, residential and commercial sectors averaged over 7.0 Bcf/d higher than last year in June. The net result was that the market was beginning to tighten relative to 2014, with 3.4 Bcf/d less gas available for storage injections.
Now, two months later at the end of August 2015, not much has changed in the supply-demand equation (again according to Point Logic Energy data). Dry gas production has been flat and consumption has continued at high levels for this time of year, which has reined in storage injections compared to last year. In other words, the market is doing what it does best --- pricing itself to achieve a balance in the zero-sum game of supply versus demand and storage capacity.
On the supply side, production has been remarkably flat. U.S. Lower 48 dry gas production began the 2015 summer season in April at 72.6 Bcf/d, and that is almost exactly where it has stayed on average since then. Figure 1 below shows production in 2015 (blue line) vs. 2014 (orange line) from January through August to date. August 2015 production is on pace to post the highest monthly average this year of about 73 Bcf/d, just shy of the record of 73.2 established in December 2014, but up less than 0.5 Bcf/d since April. In contrast, production rose about 2.0 Bcf/d between April and August in 2014. Looking at the difference between the two lines in Figure 1 you can see that the great leveling off of production this summer resulted in the year-over-year gain between 2015 and 2014 shrinking from over 5.0 Bcf/d in January to 3.7 Bcf/d in April and 2.0 Bcf/d since then.
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