You Keep Me Hangin' On - Will U.S. Natural Gas Avoid A Collapse This Year? Part 2

The March 2017 CME/NYMEX Henry Hub natural gas futures contract has shed nearly 60 cents/MMBtu (17%) since February 1, 2017, and the rest of the 2017 curve has been slashed by an average 40 cents (12%) in that time. On February 1, prices for all 10 remaining 2017 futures contracts (from March to December 2017) carried $3 handles. Now, all but two contracts are below $3. Weather has been the primary driver of this shift. February 2017 is set to rank as the warmest February since 1970, after January 2017 also came in as one of the warmest in 40 years. Weather forecasts are also showing the warmth extending into March. These developments are signaling a more bearish 2017 than expected. Today, we continue our supply and demand update with a look at the 2017-to-date balance.

This is Part 2 of our latest fundamentals update of the U.S. natural gas market based on daily supply/demand data from our NATGAS Billboard report (RBN’s joint report with IAF Advisors). As we showed in Part 1 of this series, the U.S. natural gas market in 2016 not only managed to correct the effects of an exceptionally mild winter in the first quarter and oversupply conditions through much of the year, but also ended up net short supply on average for the year. To understand how that transpired, we compared each of the supply/demand components for full year 2016 versus 2015. On the supply side, the biggest driver was U.S. gas production, which posted its first year-on-year decline of the decade as lower rig counts finally caught up to producers who had until then managed to maintain or grow production by drilling better and faster with fewer rigs. Production fell 1.8 Bcf/d from 2015. Imports from Canada helped offset the production declines, averaging up 0.6 Bcf/d from 2015, while LNG sendout (i.e. pipeline receipts from U.S. LNG import/regasification facilities) was nearly flat for the year right around 0.3 Bcf/d. Overall, total supply last year averaged down a net 1.2 Bcf/d from 2015.

On the demand side, record power burn in most months, more industrial demand, higher exports to Mexico and the emergence of new demand in the form of LNG exports together boosted demand by an impressive 2.7 Bcf/d year-on-year. Nearly half of that increase was offset by a 1.3-Bcf/d drop in residential and commercial (res/comm) heating demand, in large part due to a very mild winter in first quarter of 2016. But that still left total demand up 1.4 Bcf/d versus 2015. With total demand up 1.4 Bcf/d in 2016 and total supply down 1.2 Bcf/d, the balance averaged 2.6 Bcf/d tighter in 2016 than it was in 2015. Total supply, including imports, averaged 77.5 Bcf/d, while total demand, including exports, averaged 78.5 Bcf/d, which gave us a net balance of negative 1.0 Bcf/d in 2016, compared to a balance of positive 1.6 Bcf/d in 2015.