Mexican exports

South Texas is emerging as the newest premium destination for natural gas supply in the U.S.   Demand in the area is expected to grow much faster than local production, creating a supply shortage in the region by early 2018. New pipeline capacity will be needed to move incremental supply into South Texas. There are several projects planned to facilitate southbound capacity on pipelines running along the Gulf Coast Industrial Corridor. Today we examine the planned pipeline capacity and whether it will be enough to serve the coming demand.

U.S. natural gas exports drove a significant portion of overall gas demand growth in 2016 and are expected to continue being the primary demand driver over the next several years. Much of this export demand will be emerging along the Texas-Mexico border and at planned LNG export terminals along the southern Texas Gulf Coast. But production in the South Texas region is not expected to grow nearly as quickly or robustly as demand, setting the stage for supply constraints and premium pricing in the South Texas market and making the area a target destination for producers and pipeline companies. For example, on Wednesday, Enterprise announced the possibility of a new pipeline from Orla, TX, in the Permian Basin to Agua Dulce in South Texas. So how will all of this play out? Today, we continue our series analyzing the gas supply and demand balance in South Texas, this time with a look at the demand side and the resulting market balance.

There is a premium natural gas market developing in South Texas, where exports to Mexico could rise by more than 2.0 Bcf/d over the next four years and gas liquefaction and LNG export facilities are expected to add another 1.8 Bcf/d of demand to the market in that time. While gas production from the nearby Eagle Ford Shale is showing signs of at least a partial comeback and will help meet some of this new demand, the South Texas market may be heading toward being short supply in the next few years, resulting in higher prices there relative to surrounding markets. That would make the South Texas market an attractive destination for supply as far north as the Marcellus and Utica shales. In fact, there is a slew of proposed southbound pipeline projects extending deep into Texas along the Texas Gulf Coast for shippers to get their gas there. But how much incremental supply will be needed to balance the market? Today we begin a series analyzing the gas supply and demand balance in South Texas, starting with prospects for production growth out of the Eagle Ford Shale.

The CME/NYMEX Henry Hub January contract settled yesterday at $3.54/MMBtu, about 30.8 cents (~10%) above where the December contract expired ($3.232) and 77.6 cents (28%) higher than where November settled ($2.764). The natural gas winter withdrawal season is officially underway—it’s a lot colder and gas demand has spiked. But this week also marks another key bullish threshold: as today’s Energy Information Administration (EIA) storage report will likely show, the U.S. natural gas inventory has fallen below the prior year’s levels for the first time in two years (since early December 2014). That’s in sharp contrast to where the inventory started the injection season in April—more than 1,000 Bcf higher compared to April 2015. Moreover, we expect the emerging deficit to grow substantially over the next several weeks. Today we look at the supply-demand fundamentals driving this shift and what it means for the winter gas market.

The U.S. natural gas market in the past two years has undergone massive change, from breaking storage records and crossing long-held thresholds to flipping flow patterns and pricing relationships on their heads. This November, the market crossed yet another milestone:  the U.S. became a net exporter of natural gas for the first time ever on September 1, 2016. That lasted only a few days. But net exports resumed again starting November 1 and have continued through the month, almost without interruption, with pipeline deliveries to Mexico and to the first two liquefaction “trains” at Cheniere Energy’s Sabine Pass LNG terminal exceeding imports from Canada and LNG import terminals by an average 0.6 Bcf/d. Today, we look into what’s really driving this shift and what that tells us about the trend going forward.