The value of any commodity is based on its supply and the demand in the market. If one of them is disrupted, it affects prices. Natural gas has been a major beneficiary of the exploration boom in crude oil and the government's push to reduce greenhouse gas emissions across the world.
Natural gas marketed production has increased every year since 2005, however, for the first time in more than a decade, annual average production will decline this year by 1.4 Bcf/d from 2015 levels, according to the U.S. Energy Information Administration's Short-Term Energy Outlook report of November 8.
For 2017, the report forecasts that production will rise by 2.9 Bcf/d from the 2016 level. Hence, with additional supply to hit the markets in 2017, the demand has to increase incrementally to support prices.
However, the policies of the new President-elect Donald Trump are likely to alter both the demand and the supply projections of natural gas.
President-elect Trump plans to reduce regulatory restrictions on exploration of both natural gas and crude oil. He plans to free more federal land for crude and gas exploration. Both of those policy changes will increase the supply of natural gas over the medium-term. The current oversupplied market will see fresh supply add to the glut, which will pressure natural gas prices.
On the demand front, Trump's approval for coal, which has often bore the brunt of anti-pollution causes across the world, is likely to reduce the demand growth for natural gas.
Hence, on the policy front, we see both demand and supply projections as negative for natural gas prices.
In the nearer term, the price of natural gas is dependent on the weather conditions. Extreme hot or cold conditions increase the use of natural gas, thereby supporting prices. However, warm weather forecasts for November have dampened the demand for natural gas. The price fell on expectations that weather will remain warm till Thanksgiving day.
However, the latest weather report by natgasweather.com should bring respite to the natural gas bulls. Related: OPEC's Proposed Cut Will Not Be Enough To Boost Oil Prices
"High pressure will dominate much of the country early this week with unseasonably warm temperatures and highs of upper 50s to 70s. A weather system will strengthen over the southeastern US mid-week with areas of showers and slight cooling. More importantly, a weather system pushing into the western US later this week will track toward the eastern US next weekend with rain, snow, and cooler than normal temperatures. This will bring a surge in nat gas demand to the strongest levels so far this fall season after being lighter than normal the next 5 days".
During the end of the refill season, as of October 31, the natural gas storage was 3,986 billion cubic feet (Bcf), which is 183 Bcf (5%) higher than the five-year average as of end-October. This year's storage has overtaken the high of 3,929 Bcf set in 2012.
The STEO forecasts a higher average price of $3.12/MMBtu in 2017 compared to an average of $2.50/ MMBtu in 2016. However, any significant policy decisions can change the demand-supply metrics for next year.
By Rakesh Upadhyay for Oilprice.com
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Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm. More
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