Natural Gas Market Remains Volatile: Too Much Supply Still Chasing
Too Little Demand
Released April 6, 2017 | SUGAR LAND
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--For U.S.
natural gas producers, this could be as good as it gets for the next few years. A weak
winter heating season has caused one consulting firm, Drillinginfo Incorporated (Austin,
Texas), to sharply reduce its average gas price forecast for 2017.
In November 2016, the firm forecasted gas prices at Henry Hub would average $4.25
per million British thermal units (MMBtu) for 2017. That forecast assumed normal winter
weather. But the just-concluded winter heating season was significantly warmer than
normal, causing Drillinginfo to lower its 2017 price forecast to $3.50 per MMBtu, an 18%
decline. “Demand didn't show up because winter didn't show up,” Maria Sanchez,
Drillinginfo's manager of energy analysis, said in an interview.
Looking farther into the future, Drillinginfo predicts gas prices will hold steady at an
average of $3.50 per MMBtu in 2018 before falling to an average of $3.25 per MMBtu in
2019, 2020 and 2021.
Still, the firm's forecast of $3.50 per MMBtu this year is significantly better than
producers received for their product in 2016. Last year, gas prices averaged about
$2.51 per MMBtu and briefly fell to less than $2 per MMBtu in some months, according
to the U.S. Energy Information Administration (EIA) (Washington, D.C.).
The image below shows natural gas price trends.
In a new report to clients, “Redefining Bullish,” Drillinginfo sets out its more pessimistic
price scenario for gas as well as oil. “Compared to our forecast in late 2016, we now
see prices as being lower for longer,” Sanchez said, adding: “We're in a period of
persistent low prices,” where demand, while strong, is outstripped by production growth.
The “Redefining Bullish” report notes the increasing complexity and volatility of the U.S.
natural gas market. Factors affecting demand and production, and thus supply and
prices, include exports to Mexico, liquefied natural gas (LNG) exports, midstream and
pipeline constraints and increased demand from petrochemical companies.
“Last year, low prices were one of the main reasons gas production fell by about 1.4
billion cubic feet per day (Bcf/d) compared to 2015,” Sanchez told Industrial Info. “That's
the first time production has declined in a decade. Right now, production is about 2
Bcf/d below 2016 production.” Dry gas production averaged about 70.5 Bcf/d for the first
three months of 2017, she noted.
Another factor keeping prices low, at least in the Marcellus and Utica shale regions, is a
shortage of pipeline takeaway capacity. But Sanchez told Industrial Info she sees that
situation improving this year, as four major gas pipelines coming out of the Marcellus
and Utica are scheduled to be operating by the end of this year. The four projects are
the ET Rover, Atlantic Sunrise, Leach Xpress and Rayne Xpress. These four pipeline
projects will add about 5.6 Bcf/d of takeaway capacity from the Marcellus and Utica
shales by the winter heating season of 2017-2018, she predicted.
The total investment value of those four projects is about $8.6 billion, according to
Industrial Info's North American Project Platform. That platform has a new "umbrella
project" search function so subscribers can more easily identify all the different projects
that are part of a larger project. The Rover pipeline project, for example, comprises 28
separate projects. Atlantic Sunrise has 11 separate projects, while Leach Xpress has
nine, according to the platform.
Gas production from the Marcellus Shale is expected to increase about 1 Bcf/d this year
compared to 2016, and Drillinginfo predicts production in the Utica Shale will grow by
about 0.75 Bcf/d this year. Production also is expected to grow by about 0.6 Bcf/d over
last year's production, the firm predicted. Offsetting these gains is an expected decline
in production from the Eagle Ford Shale in Texas, where production is expected to fall
about 0.5 Bcf/d this year compared to 2016.
In the highly competitive power burn market, higher gas prices in 2017 will result in
lower demand for gas among electric generators, Drillinginfo forecast. Natural gas
power burn this year will fall about 2 Bcf/d from last year's demand, to about 25.4 Bcf/d
from 27.3 Bcf/d last year, allowing coal to recapture some lost market share, Sanchez
said.
The image below is Drillinginfo's forecast of gas demand for the power segment.
Increased demand for coal would be welcome news in Coal Country, which is still
savoring President Donald Trump's March 28 executive order to the U.S. Environmental
Protection Agency to rework the Clean Power Plan. For more on that, see March 29,
2017, article - Trump Begins Process of Undoing Obama's Climate Change Measures.
“In the power burn market, it's all about prices,” Sanchez said.
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