- U.S. demand hits record high during cold snap.
- Natural gas inventories fall below five-year average.
- Gas exports are set to grow by more than 55% in 2018.
- Permian drilling activity has led to a sharp rise in associated gas.
The recent bout of cold weather tested the U.S. electricity grid and put a strain on natural gas supplies, sharply increasing prices. Midstream bottlenecks led to spot prices in New York briefly surging to $175/MMBtu, making natural gas in the northeast the most expensive in the world.
U.S. demand for gas broke new records, fundamentals are tighter than they have been in years, and exports are also rising quickly—but the U.S. natural gas market is expected to remain well supplied throughout 2018. Natural gas producers are set to hit new output highs this year, and surging production will likely cap prices.
The U.S. broke a record for gas demand at the start of the year, consuming 143 billion cubic feet of gas on January 1, breaking the previous record set during the “Polar Vortex” in 2014. The strain on supply led to some rare developments in energy trade, with the U.S. importing LNG, diesel, and heating oil from Europe in order to meet demand.
The seasonal spike in natural gas consumption is taking place at a time when structural demand for gas has been on the rise for years.
Millions of consumers heating their homes precipitated sharp drawdowns in the volume of gas sitting in storage. For the week ending on January 5, gas inventories dipped to just 2,767 billion cubic feet (bcf), which is 415 bcf below last year’s levels and also 382 bcf below the five-year average. In fact, gas inventories are now slimmer than they have been in years, particularly compared to the unusually mild winters of 2016 and 2017 that left storage levels exceptionally high. “We could consume upwards of a quarter of the stored natural gas just this month,” John Kilduff, partner at Again Capital, told CNBC in early January.
The seasonal spike in natural gas consumption is taking place at a time when structural demand for gas has been on the rise for years. The ongoing switch from coal to natural gas for electricity generation has supported demand even as consumption varies widely according to the time of year. The lows seen in spring and autumn are structurally higher, as are the winter peaks, aside from the last two years.
Gas exports rising
Dominion Energy’s Cove Point LNG facility on the Chesapeake Bay is expected to reach full capacity in 2018.
The U.S. is also ramping up gas exports, adding another source of demand to the mix. It is important to note that the volume of gas shipped abroad is a small fraction compared to domestic demand. Nonetheless, exports are set to grow by more than 55 percent in 2018 to 3.0 bcf/d, up from 1.9 bcf/d last year. The uptick will be the result of new export terminals coming online. Dominion Energy’s Cove Point LNG facility on the Chesapeake Bay is expected to reach full capacity in 2018, and by the end of the year, Freeport LNG in Texas is expected to bring its first LNG train online. LNG exports will continue to grow at a rapid rate, averaging 5.5 bcf/d in the second half of 2019.
Gas exports to Mexico are also rising quickly, and will expand as new cross-border pipelines come online. More interconnections, combined with the cheap price of Texas shale gas, is leading to strong interest from Mexican utilities. Gas exports to Mexico grew by at least 0.4 bcf/d last year (final data is available only through October), and will increase by another 0.6 bcf/d this year and 0.8 bcf/d in 2019, hitting an average of 8.0 bcf/d next year.
Record-breaking consumption levels at a time when exports are on the rise and natural gas inventories are falling to multi-year seasonal lows would typically bring much higher prices. However, NYMEX prices for February delivery remain below $3/MMBtu, and have posted only modest gains since the cold snap began in December. The collective shrug from the gas futures market largely stems from the fact that natural gas supply is rising quickly.
NYMEX prices remain below $3/MMBtu, and have posted only modest gains since the cold snap began in December.
In its latest Short-Term Energy Outlook, the EIA projected growth in dry natural gas production of 6.9 bcf/d in 2018, up nearly 10 percent versus 2017, the largest annual increase ever recorded. As a result, natural gas prices should remain flat for the foreseeable future, the EIA argues, averaging $2.88/MMBtu and $2.92/MMBtu in 2019.
The production gains will in large part come from the Appalachia region, which encompasses the massive Marcellus and Utica shales. The EIA notes that the surging output from Appalachia is the result of several key pipelines coming online, allowing more gas to move from Pennsylvania, Ohio, and West Virginia to markets in the Midwest, Mid-Atlantic, and Southeast.
At the same time, natural gas output is rising quickly in the Permian Basin, although the increase in this area has more to do with rapidly expanding oil production. Shale drillers are expected to contribute to U.S. oil production rising by one million barrels per day (mbd) to 10.3 mbd this year. Much of increase will come from West Texas. The flurry of drilling activity has translated into a sharp rise in associated gas production from the Permian, a trend that is expected to continue. In the EIA’s December Drilling Productivity Report, the agency forecasted an increase in shale gas production of 0.764 bcf/d in January from a month earlier—with gains from Appalachia (+0.347 bcf/d) and the Permian (+0.190 bcf/d) leading the way.
One major positive for producers and consumers is that, unlike in crude oil, the market for natural gas in the U.S. is relatively stable. Short-term weather events can result in localized price spikes, but those typically quickly dissipate. Temporary situations of scarcity, such as those in New England, are more an outgrowth of restricted pipeline capacity rather than a shortage of supply. Surging shale gas production should ensure ample supplies for the foreseeable future, which will likely keep prices trading in a relatively narrow band throughout 2018.