Summer Season

The U.S. natural gas market is starting its 2015-16 winter season with a whopping 3,929 Bcf in storage, equal to the record maximum level set Nov. 2, 2012.   Meanwhile gas production is also well above last year. Given these conditions, the market will need record demand to absorb incremental production and work off the surplus in storage. But weather forecasts so far are pointing toward a delayed start to winter heating demand. The price of natural gas has sagged under the pressure with the prompt CME/NYMEX Henry Hub futures contract treading at a price less than half this time last year.  And, now, a number of operational factors and constraints are set to kick in for the winter that could further disrupt an oversupplied market. In today’s blog, we look at the storage and transportation dynamics that could factor into how the market balances this winter.

The Energy Information Administration (EIA) yesterday (Thursday) reported the U.S. natural gas storage inventory is 3,877 Bcf as of Oct. 23, which is above the 5-year maximum for this week and within striking distance of breaching the all-time record high of 3,929 Bcf (Nov. 2, 2012) by the end of the traditional storage injection season on Oct. 31. And, while the production growth rate has slowed compared to recent years, and even dipped a bit over the past couple of weeks, total gas production is still near record levels and about 2.0 Bcf/d higher than last year. Now the gas market is about to flip to withdrawal season, when winter heating demand typically exceeds available local production, leading to storage drawdowns. The combination of high storage and production levels sets up a bearish dynamic for the winter market.  Today, we take a look at the supply and demand balance going into the winter gas market.

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.