2017 was an important milestone in the history of US natural gas production, because that was the first year since 1957 the US became a net natural gas exporter. Ever since 2009, when the US ramped up shale gas production to overtake Russia the world’s largest producer overall, natural gas output has increased almost every year. And in 2017, annual production increased another 1% to reach 73.6 billion cubic feet per day (Bcf/d). With US natural gas now exported to places such as China and South Korea, the percentage of production which is put into storage to meet energy demand for the winter months has shrunk.
Now, the weather in the US plays a more important factor in gas prices, since increased demand for heating and cooling will affect US storage levels, which are at dangerously low levels. And the forecast for the summer months in the US are for very hot weather, which could create a surge in gas prices. For example, the all time record high temperature for places like Omaha, Nebraska was 94 degrees Fahrenheit, but the post Memorial Day holiday forecast is for 100 degrees. And models which track the change in weather forecasts showed not only consecutively bullish (for natural gas) revisions, but also outsized changes in the size of the revisions.
Higher gas prices would be needed in order to entice more production since more supply will have to be generated to put into storage before the start of winter in 2018. Currently, natural gas storage for winter this year is expected to be hundreds of billions of cubic feet below what is generally considered a “safe” level of 3.6 trillion cubic feet, according to the US Energy Information Administration (EIA). On May 18th, working gas storage was 1,629 Bcf, which is 804 Bcf lower than the same time in 2017. In the chart below, the figure is still within the year historical range, but 499 Bcf below the average. Daily gas output has only risen 2 Bcf since last December, which is not enough to offset annual and 5 year average annual storage deficits, even without the forecasts for hotter weather this summer.
The next EIA report is due on June 7th, and the natural gas market will be watching to see if the extra hot weather in the US will be eating away at storage further. Because of the time lag in getting permits for wells issued and assembling the necessary manpower to work on gas rigs, it may well be after the summer in September, before enough production can be raised to offset the depletion of current storage. This means that enough demand for energy must be met by increased production from coal plants, which could happen if natural gas prices were to rise enough cause another drop in the coal-to-gas switching ratio for the summer months (grey areas in the chart below). Thanks to the recent rise in natural gas, the spread between natural gas and coal is down by a third since 2017, so the April to September period this year could also see less coal-to-gas switching, and more reliance coal as we saw in 2015.
Source: Bluegold Research
On Friday, natural gas futures settled at 2.9820 on light volume, up more than 1%. In the daily chart below, natural gas is traveling up within a rising price channel (in blue). After spiking as high as 3.628 back in January, it corrected all the way down to the lows of last year (yellow dotted line), where it found support ahead of the rally into the coming summer months.
In the weekly chart below, the support line (in yellow) where natural gas is now rising from was also the support line established in the second half of 2016. The spike rally in January of this year suggests that another rally attempt to the high of 2016 is possible, even if natural gas prices were to fall below the yellow support line initially.
Charts by: ThinkorSwim
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