Low Gas Prices

The natural gas market just managed to dodge a collision this summer between excess gas supply and available storage capacity. Now about a month into the gas winter season, storage inventories are still near record levels after topping 4.0 Tcf just two weeks ago. The Henry Hub CME/NYMEX January contract price closed yesterday (December 2, 2015) at $2.165/MMBtu, historically low even as we head into the highest demand months of the year. It’s now clear that 2016 will inherit this bearish market unless there is a Polar Vortex Tsunami in January and February. But what does this mean for producers, and how much will demand respond? In today’s blog, we begin a series on potential scenarios for the 2016 gas market balance.

Projected growth in U.S. methanol production was based in large part on the expectation that domestic natural gas prices would remain significantly lower (on a per-MMBtu basis) than the price of crude oil, and that Asian demand for U.S.-sourced methanol would continue rising at a fast clip. Today both of those assumptions look dicey.  Natural gas prices remain low, but crude prices have languished below $50/Bbl for most of the past two months, and there are worries that China (by far the world’s largest methanol consumer) may be an economic bubble about to burst. Today, we consider recent developments that could slow the long-anticipated growth in natural gas use by U.S. methanol producers.

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.