Despite starting the 2017 injection season on April 1 with much less gas in storage than last year, U.S. natural gas prices in recent months have struggled to return to $3.00 levels. The market has been dealing with a mixed bag of factors, with demand down significantly, mostly due to milder-than-normal weather and the rise of competing generation sources. On the supply side, even though production has been flat and imports from Canada down, those developments combined with higher exports of LNG have not been enough to prevent larger injections into storage. Now, prospects for a price rally are waning as summer gives way to the more temperate shoulder season. Where does that leave the gas market heading into winter? Today, we begin a series looking at how gas market fundamentals have shaped up this summer as well as prospects for the winter.
This is the latest of our periodic updates on the fundamental factors influencing the U.S. natural gas market based on daily supply/demand data from our NATGAS Billboard report (RBN’s joint report with IAF Advisors). When we last wrote about U.S. natural gas supply and demand in mid-June in our blog Can’t Stand Losing (Demand), the market was still feeling the bullish after-effects of the withdrawal season (November 2016–March 2017), which, despite an incredibly balmy winter, had concluded with a balance (total supply minus total demand) that was on average more than 3.0 Bcf/d tighter (net shorter supply) than the previous winter and with 400 Bcf less gas in storage than a year earlier.
Through April and May — the first two months of the official 2017 injection season, which runs from April to October — that balance loosened a bit, but continued to support $3.00/MMBtu gas for the prompt month in the futures market. On the supply side, outright production volumes were trailing 2016 by about 1.0 Bcf/d. With net imports from Canada also straggling a bit and LNG imports flat, there was overall less supply in the market than a year earlier. On the demand side, power demand was averaging a hefty 3.0 Bcf/d lower versus 2016, but the hottest months were still on the horizon. Plus, export demand — including gas deliveries into Cheniere Energy’s Sabine Pass export facility and exports to Mexico — was roaring, with average volumes in April–May up about 2.0 Bcf/d year-on-year. By the end of May, the year-on-year deficit in storage had reduced a bit but the inventory was still lagging about 380 Bcf behind the year-ago level. The prompt NYMEX/CME Henry Hub futures contract — after falling into the $2.50s in late February and averaging just shy of $3.00/MMBtu in March — rose averaged $3.19/MMBtu and $3.24 in April and May, respectively. And, it seemed like $3.00 gas was here to stay for a while, assuming weather cooperated.