As of the weekly EIA natural gas storage report due out today (Thursday) for the week ending February 5, 2016, the U.S. gas inventory surplus is likely to grow to near 600 Bcf above levels at the same time last year. Current weather forecasts suggest the surplus over 2015 will soar to near 800 Bcf by the end of February. With outright inventory levels already exceptionally high, this surplus growth kicks the market’s oversupply problem further down the futures curve – meaning prices could stay lower for longer. Today we look at the winter 2015-16 fundamentals leading to this surplus and what it means for the rest of 2016.
The gas market started this winter (November 2015 to March 2016) oversupplied, with a record high inventory and a surplus of nearly 400 Bcf versus the previous year. At the time a cold hard winter presented the best chance to correct the supply/demand imbalance through increased heating demand. But weather forecasters instead predicted an exceptionally warm winter due to the effects of El Nino. And sure enough, winter has been largely a no-show so far. Meanwhile, on the supply side, gas production has not given up any ground, and in fact, has even experienced another surge to record levels in recent weeks. This mixture of lower demand and higher supply has meant not as much gas has been withdrawn from storage to meet winter peak needs as usual this year. As a result, the storage surplus has continued to grow.
On the supply side, U.S. dry gas production has remained resilient. After a spate of freeze-offs at the end of 2015, production rebounded to near 73 Bcf/d by mid-January (2016) and just this week set a new record high of 74.2 Bcf/d. Production is also higher this winter because it hasn’t been affected by cold-weather and freeze-offs in January to the extent it was in prior years (see Cold As Ice). Production growth is entirely driven by the U.S. Northeast, where it has climbed 2.7 Bcf/d (14%) since October 2015 and is averaging 2.2 Bcf/d higher winter to date versus last year, according to pipeline flow data from Genscape. Nearly all producing states within the Northeast region are now above their 2015 monthly average peaks, but the biggest growth has come from Ohio and Southwestern Pennsylvania (SWPA) regions. This winter to date, the Utica in Ohio is up 1.8 Bcf/d versus the same period last year, while SWPA is up 1.1 Bcf/d. And in recent months, these two areas have climbed between 0.3 Bcf/d and 0.4 Bcf/d higher than their 2015 peak. In fact, Northeast production growth, led by the Utica’s highly prolific super-wells, has managed to single-handedly offset declines in all the other U.S. basins, primarily the Eagle Ford Shale in Texas and the Haynesville Shale in Louisiana. This growth was facilitated by new pipeline takeaway capacity out of the Northeast, including some capacity added in late-2015 (see Top Drivers in The Northeast Gas Market).