After ending 2016 on a bullish note, the U.S. natural gas market has been hammered so far in 2017 by relentlessly mild weather—January 2017 ranked as the fifth warmest in 40 years. The prompt CME/NYMEX Henry Hub futures contract, which had climbed to nearly $4.00/MMBtu by late December 2016, has come off more than $1.00 since then to settle at $2.834/MMBtu as of last Friday (February 17, 2017). With every balmy winter day that passes, the chances of sustained $3-$4 natural gas prices seem to be fading away. Nevertheless, there are still some bulls out there hanging on in hopes of a rebound. Prices are still well above year-ago levels and the underlying supply/demand balance continues to carry the implied potential for tightening if given even normal weather. In today’s blog, we provide an update of the gas supply/demand balance, starting with a recap of how we got here.
This is the latest of our periodic updates on the fundamental factors influencing the U.S. natural gas market—in particular the supply/demand balance, based on daily supply/demand data from our NATGAS Billboard report (RBN’s joint report with IAF Advisors). When we last wrote about the U.S. natural gas supply/demand balance in mid-December 2016 in The Long and Winding Road, the storage inventory had managed to decline from a record high a month earlier in mid-November to near the five-year average. Production was lagging. LNG and Mexico exports were ramping up. Demand on a per-degree basis was strong. And the overall supply/demand balance suggested the market was headed for a bullish start to 2017, assuming normal to cooler-than-normal weather. Instead, since the New Year, weather has been almost unceasingly bearish, with the potential to derail what the market expected would be a recovery in 2017.
We’ll get to how fundamentals could play out this year in the next part of this blog series. But first, it’s worth taking a step back to review how we got here. So we start today with a recap of supply/demand dynamics in 2016.