Natural Gas Market Remains Volatile: Too Much Supply Still Chasing Too Little Demand
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)–For U.S. natural gas producers, this could be as good as it gets for the next few years. A weak winter heating season has caused one consulting firm, Drillinginfo Incorporated (Austin, Texas), to sharply reduce its average gas price forecast for 2017.
In November 2016, the firm forecasted gas prices at Henry Hub would average $4.25 per million British thermal units (MMBtu) for 2017. That forecast assumed normal winter weather. But the just-concluded winter heating season was significantly warmer than normal, causing Drillinginfo to lower its 2017 price forecast to $3.50 per MMBtu, an 18% decline. “Demand didn’t show up because winter didn’t show up,” Maria Sanchez, Drillinginfo’s manager of energy analysis, said in an interview.
Looking farther into the future, Drillinginfo predicts gas prices will hold steady at an average of $3.50 per MMBtu in 2018 before falling to an average of $3.25 per MMBtu in 2019, 2020 and 2021.
Still, the firm’s forecast of $3.50 per MMBtu this year is significantly better than producers received for their product in 2016. Last year, gas prices averaged about $2.51 per MMBtu and briefly fell to less than $2 per MMBtu in some months, according to the U.S. Energy Information Administration (EIA) (Washington, D.C.).
In a new report to clients, “Redefining Bullish,” Drillinginfo sets out its more pessimistic price scenario for gas as well as oil. “Compared to our forecast in late 2016, we now see prices as being lower for longer,” Sanchez said, adding: “We’re in a period of persistent low prices,” where demand, while strong, is outstripped by production growth. The “Redefining Bullish” report notes the increasing complexity and volatility of the U.S. natural gas market. Factors affecting demand and production, and thus supply and prices, include exports to Mexico, liquefied natural gas (LNG) exports, midstream and pipeline constraints and increased demand from petrochemical companies.
“Last year, low prices were one of the main reasons gas production fell by about 1.4 billion cubic feet per day (Bcf/d) compared to 2015,” Sanchez told Industrial Info. “That’s the first time production has declined in a decade. Right now, production is about 2 Bcf/d below 2016 production.” Dry gas production averaged about 70.5 Bcf/d for the first three months of 2017, she noted.
Another factor keeping prices low, at least in the Marcellus and Utica shale regions, is a shortage of pipeline takeaway capacity. But Sanchez told Industrial Info she sees that situation improving this year, as four major gas pipelines coming out of the Marcellus
and Utica are scheduled to be operating by the end of this year. The four projects are the ET Rover, Atlantic Sunrise, Leach Xpress and Rayne Xpress. These four pipeline projects will add about 5.6 Bcf/d of takeaway capacity from the Marcellus and Utica shales by the winter heating season of 2017-2018, she predicted.
The total investment value of those four projects is about $8.6 billion, according to Industrial Info’s North American Project Platform. That platform has a new “umbrella project” search function so subscribers can more easily identify all the different projects that are part of a larger project. The Rover pipeline project, for example, comprises 28 separate projects. Atlantic Sunrise has 11 separate projects, while Leach Xpress has nine, according to the platform.
Gas production from the Marcellus Shale is expected to increase about 1 Bcf/d this year compared to 2016, and Drillinginfo predicts production in the Utica Shale will grow by about 0.75 Bcf/d this year. Production also is expected to grow by about 0.6 Bcf/d over last year’s production, the firm predicted. Offsetting these gains is an expected decline in production from the Eagle Ford Shale in Texas, where production is expected to fall about 0.5 Bcf/d this year compared to 2016.
In the highly competitive power burn market, higher gas prices in 2017 will result in lower demand for gas among electric generators, Drillinginfo forecast. Natural gas power burn this year will fall about 2 Bcf/d from last year’s demand, to about 25.4 Bcf/d from 27.3 Bcf/d last year, allowing coal to recapture some lost market share, Sanchez said.
Increased demand for coal would be welcome news in Coal Country, which is still savoring President Donald Trump’s March 28 executive order to the U.S. Environmental Protection Agency to rework the Clean Power Plan. For more on that, see March 29, 2017, article – Trump Begins Process of Undoing Obama’s Climate Change Measures. “In the power burn market, it’s all about prices,” Sanchez said.
Drillinginfo delivers business-critical insights to the energy, power, and commodities markets. Our state-of-the-art SaaS platform offers sophisticated technology, powerful analytics, and industry-leading data. Our solutions deliver value across upstream, midstream and downstream markets, empowering exploration and production (E&P), oilfield services, midstream, utilities, trading and risk, and capital markets companies to be more collaborative, efficient, and competitive. Drillinginfo delivers actionable intelligence over mobile, web, and desktop to analyze and reduce risk, conduct competitive benchmarking, and uncover market insights. Drillinginfo serves over 3,500 companies globally from its Austin, Texas, headquarters and has approximately 650 employees. For more information visit drillinginfo.com.