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With prompt month expiring at $3.79 per MMBtu today, we knew it was coming. I've been warning about the assured rise in natural gas prices since the middle of Summer.
The story begins with historically low gas storage (despite record high production), a fear factor that was surely to materialize in pricing.
The U.S. gas market is about to switch from summer to winter, from injections to withdrawals. Accounting for nearly half of all U.S. gas demand, the Res/Comm sector will be the focus. Although 2019 will be the "U.S. LNG export ramp up" story, the key for the next few months will be winter gas heating, how big or how small.
For the next week, forecasts are cold, but a warmer end to November is expected and even a mild December is the current call.
Has winter already started? In recent days, demand has surged up over 100 Bcf/d, which is the level for a typical winter day.
Let me be clear: the notion that gas storage is somehow becoming less important because production can come online so quickly is....not true.
Simply put, we cannot meet winter gas demand without storage.
The extreme but perfect example of this was January 1 of this year, "the coldest day of the century." We devoured a record 143 Bcf/d of gas, yet we produced just 72 Bcf/d of gas that day, or almost exactly half of what we used.
In fact, we require even more physical locations to store gas. Think about it: even though our gas market has steadily expanded about 33% in the shale-era post 2008, our storage capacity has been flat in recent years, at 4.5 to 4.7 trillion cubic feet.
As our gas market continues to grow, so must our ability to store gas to meet peaks in demand, especially since these high points will become more profound as LNG exports become a bigger piece of the U.S. demand pie. I would argue that the potential for U.S. LNG export is almost unlimited and, along with piped gas to Mexico, must become a baseload demand market for EIA reporting.
U.S. LNG exports are our largest incremental demand market. And changing weather abroad in China, India, and elsewhere - and thus fluctuating heating/cooling needs - will have more of an influence here in the U.S., as our spot market shippers ramp up to meet their needs. Without new storage capacity, we will be adding unwanted variability to our own domestic prices.
Marking the winter flip for the gas market, the next two storage reports are expected at a ~43 Bcf injection and then a ~105 Bcf WITHDRAWAL after that.
We have been seeing the highest prompt month gas prices since December 2016.
Prices really started to rise around September 20, with the expectation of a cold start to October and an early beginning to heating needs.
October, however, started off unusually warm and then descended into the coldest October we have had in five years. From start to finish, gas prices during the month increased just 6%.
Yet, for the first 12 days of November prices are up 17% as the winter heating season is imminent.
Although still hitting record levels, U.S. gas production has been flat recently at around 85 Bcf/d, but still nearly 20% higher than the 2017 average.
We shall see how the drop in oil prices will impact associated gas production in the Permian basin in West Texas, the second most vital U.S. gas field. Oil prices are down 20% since early-October. With a new Drilling Productivity Report out this week, EIA sees no signs of the Permian slowing down.
More pipelines are ramping up to full capacity soon, such as Nexus and Rover lines running west and then north from Appalachia, and EIA keeps upping its forecast for production in 2019, at 85 Bcf/d a few months ago, then to 87 Bcf/d, and last week projecting we will hit closer to 90 Bcf/d. Clearly, the lid on domestic U.S. gas prices is booming production that has no end in sight.
And as mentioned, the story next year will be U.S. LNG exports. By the end of 2019, our capacity to export will have tripled from today.
As of late, LNG feedgas has been up over 4 Bcf/d for the first time ever.
Total demand year-to-date has been at 85 Bcf/d this year, well above the 77 Bcf/d in 2017.
Indeed, increasingly so, the U.S. natural gas market and price are based on the collision of record demand amid record production.
For the U.S. natural gas market, winter has begun.
