Natural gas markets have experienced a dramatic change in just the past two months, upending forecasts about a protracted period of oversupply.
The EIA reported a major decline in natural gas inventories for the week ending on December 23, a drawdown of 237 billion cubic feet (Bcf), which takes storage levels in the U.S. down to 3,360 Bcf. That is 10 percent lower than year-ago levels at this time of the year, and also 2.3 percent lower than the five-year average. This is a remarkable turnaround in just a few weeks’ time.
Natural gas prices have been low for years amid a persistent state of oversupply. Gas production has increased inexorably for years, providing more than enough supply to meet demand. The mild winter last year plunged the market into a state of disorder. Excess gas was diverted into storage, taking inventories to record levels. As a result, natural gas prices cratered below $2/MMBtu and there was not a lot of hope that the market would adjust in the near-term.
But production began falling, having dipped 5 percent since February. That raised the prospect of inventories coming back down towards the five-year average, but many analysts still saw a huge buffer that could last through this current winter season.
Since October, however, gas inventories have begun to drawdown in dramatic fashion. The fact that inventories are now below the five-year average is an extraordinary development (the blue line in the chart below has dipped below the dark gray line, after staying above it since mid-2015). Related: Has The OPEC Rally Gone Too Far?
(Click to enlarge)
What does this mean? The U.S. is no longer overflowing with gas, which means the gas markets are no longer in a state of oversupply. It is no coincidence then that NYMEX gas contracts for February delivery have surged to $3.80/MMBtu, the highest price in more than two years. Those prices are also up by roughly half since October, a stunning price rally.
Moreover, there is plenty of room to run for natural gas prices. Production in September – the latest month for which monthly data is available – was still 4 percent lower than February 2016 levels. And demand has been very strong so far this winter with chilly temperatures and winter storms across the country. It is entirely conceivable that natural gas tops $4/MMBtu this winter, a level not seen since 2014.
In addition, with supply relatively inelastic in the short-term, inventories could continue to fall, dipping well below average levels. That tightness could send gas prices even higher.
Winners: Natural gas drillers, coal producers
Losers: Owners of gas-fired power plants, petrochemical and industrial customers that use gas as an input, consumers
(Click to enlarge)
By Charles Kennedy of Oilprice.com
More Top Reads From Oilprice.com:
- The Five Countries Threatening OPEC Unity
- China’s Largest Oilfield To Cut Capex By 20% In 2017
- Shale Spending Is Set To Soar