Market Newsletter – April 2018April 01, 2018
As we move into April and begin to turn focus towards injection season and the spring shoulder period, it’s important to first review and consider the impacts of the preceding 2018 winter months. Yesterday, the EIA reported a -29 Bcf change in storage, bringing total storage to-date at 1.354 Tcf. One year ago, stocks were 34% higher and we were already into injection season. The recent cold weather through late March and early April has been providing some extended heating demand not typically seen at this point in the year, and as such, has provided corresponding price support as natural gas futures have hovered around the $2.70 mark for the better part of the month of March.
Over the coming weeks, the first injection and more normalized weather patterns expected for the second half of April will temper the bullish sentiments in the market. While the mounting bearish pressure from increasing production and decreased heating demand will drive the price of natural gas down, the corresponding increase in power burn should tighten storage levels and increase both the price of natural gas and electricity down the road. How far the seesaw swings back up is entirely dependent upon the delicate balance between production and demand. As of today, production remains steady at ~79 Bcf/day and any additional increases in supply will serve to keep a lid on prices. However, should the summer forecast end up proving bearish, we could potentially be looking at a long-term supply excess as the existing vertical of LNG demand that has served to prop up prices is now threatened by the Trump administration’s $60 billion in tariffs on China.
There has been a strong negative response to President Trump’s 25% tariff on imported steel, mostly due to the immense amounts of capital investments into energy technologies (upstream, midstream and downstream) that are directly impacted. For example, the 25% increase for a typical pipeline project would result in somewhere around $75 million in increased costs. Furthermore, strong LNG exports to China, South Korea, and Japan could potentially become a casualty of the tariff crossfire if tensions continue to escalate and the long-term deals that producers and exporters have established with state-owned and private importing entities could very quickly be put in danger. Should the LNG vertical demand be drastically impacted, we could begin to see overall domestic production (and corresponding injections) scaled back until prices reach a technical level that warrants continued production.