Market Newsletter – March 2018March 01, 2018
Halfway through Q2 with the rudder slowly turning towards injection season, natural gas storage inventories now stand at 1,682 Bcf, a 29% reduction from just one year ago, and 18.1% below the five-year average. With stocks at a multi-year low, one month left in withdrawal season and some cold weather on the way for the northeast in March, we might expect to see some corresponding price movement to the upside. However, the price of natural gas has remained relatively stable of late, with the April futures contract now trading just under $2.70/MMBtu. To put this in perspective, when we came out of 2014 winter and stocks were at an all-time low of 824 Bcf, the price of natural gas skyrocketed to $6.50/MMbtu. That type of movement and volatility is traditionally the expectation when there are more buyers in a market than there are sellers, yet we find ourselves in a very similar situation with subdued volatility.
Natural gas production is currently one of the main drivers of low natural gas prices. Both improvement in technique and a favorable political climate have allowed for more efficient production in Marcellus shale regions. Futhermore, tax reform has had a significant impact on the economics of production and output. The result is continual record-setting production numbers, running about 6 Bcf/day higher than last year at this time. Essentially, the 6 Bcf per day of additional production over the last year is being demanded by seasonal heating loads when cold, power generation requirements on the coldest days, and pipeline exports to Mexico along with LNG trade. As the market transitions to the next storage injection season in April, it appears confident that strong flowing supplies will fill the increment by which storage inventories trail compared to recent volumes. If this is truly the case, and the next four weeks of withdrawal season prove to be bearish, then the question remains of when the market may find a bottom.
In the past two years, the market has reached lows in either February (2017) or March (2016). Depending on how any extreme cold weather ahead of us plays out, we could see a short-lived decline in the next few weeks that could potentially take us to a new low (~$2.52/MMBtu). That being said, LNG export terminals are gearing up to offset gains in production, as LNG exports from Sabine Pass are approaching 1 trillion cubic feet since Feb-2016, with the top destinations being Mexico, South Korea, and China. Furthermore, the new LNG facility in Maryland (Cove Point) is inching closer to its first export under 20-year contracts inked with Japan and India. This vertical will surely continue to boost natural gas prices and will likely be one of the main drivers of prices returning to a more normalized average of $3.20-$3.30 in 2018.