Sky's the Limit, Part 2 - How U.S. Demand is Factoring into the 2018 Gas Storage Injection Season

Lower 48 dry gas production has climbed 3 Bcf/d since April to nearly 82 Bcf/d this month to date, which is an average ~9 Bcf/d — or 12% — higher year-on-year. Despite that meteoric rise in supply, the U.S. gas storage inventory, which started the injection season well below year-ago and five-year average levels, continues to carry a substantial deficit. That’s because record demand volumes thus far have managed to keep storage injections in check. Today, we provide an update of the demand factors affecting the 2018 gas injection season.

As we discussed last week in Part 1 of Sky’s the Limit, a combination of new pipeline takeaway capacity, rising demand and the completion of seasonal maintenance events converged in the final weeks of June (2018) to bring a surge of supply. Prior to late June, Lower 48 gas production had been range-bound near the 79 Bcf/d level. In the last two weeks of June, gas volumes abruptly shifted up by about 1.5 Bcf/d to a record just shy of 82 Bcf/d. In early July, the growth slowed but continued setting new highs, with production reaching a peak of 82.1 Bcf/d on July 8. Daily estimates from RBN’s NATGAS Billboard report indicate volumes have receded to near 81 Bcf/d in the past few days, yet it’s clear that, aside from the daily ups and downs, a level-shift has occurred for production that is likely to persist. On average for the injection season to date (April 1 through July 12), production levels have been about 8.3 Bcf/d higher than last year and 9 Bcf/d higher than the five-year average level for this period. (In July to date, that year-on-year production increase is more like 9.3 Bcf/d.) If we then include imports from Canada, which are up 0.5 Bcf/d year-on-year, and nearly flat LNG imports, overall supply this season to date has averaged 85.6 Bcf/d, nearly 9 Bcf/d higher year-on-year.

The production gains have had a starring role in subduing bullish sentiment in the market in recent weeks, even as storage inventory levels remain well below year-ago and five-year average levels. As Figure 1 shows, the market started the 2018 injection season in April with about 700 Bcf less in storage than the same time last year (green line, left axis) and also about 350 Bcf short of the five-year average for that time of year (blue-shaded area). Since then, the year-on-year deficit expanded to more than 900 Bcf in late April before shrinking again, and, as of the latest EIA weekly storage report released July 12, it stood at about 730 Bcf. It’s expected to shrink by another 100 Bcf or so by early August (green-dotted line to right), based on the latest NATGAS Billboard storage projections. But that would still leave it a good 600 Bcf short of the year-ago level and just 100 Bcf short of where it started injection season. The deficit versus the five-year average has been even more stubborn, expanding from that 350 Bcf level to nearly 500 Bcf in recent weeks and the model projections (yellow-shaded area) show it holding on to that level through July and into early August.