Energy Market Update - Beginning of 2018

Published: January 1, 2018

Reasons to Buy:

  • Weather normalized demand continues to grow.
    • At least 90,000MW of new natural gas generation currently being developed (150+ new plants to be online by 2020.)
    • Gas exports continue to increase:
      • Mexican gas exports expected to double by 2019.
      • LNG export capacity is rapidly growing.
        • Forecast to potentially reach 12 Bcf/d by 2020.
        • Several new LNG facilities coming online in the next year.
          • Dominion Energy’s (0.7 Bcf/d) Cove Point terminal expected to online by end of this year.
  • Market will turn bullish quickly depending on weather.
    • As we shift to the withdrawal season, attention shifts to cold weather forecasts and the associated heating demand (Heating Degree Days).
    • Colder than average weather forecasted for the next 14 days.

Reasons to Wait:

  • With natural gas production growth continuing into 2018 and significantly higher rig counts versus last year, the market could fall if incremental demand doesn’t keep up.
    • Production
      • 184 gas rigs (+1 vs. last week) vs. 129 gas rigs last year.
      • “Natural gas production has shown year-on-year growth since June 2017, and inventories are within 1% of the five-year average level, which may moderate implied volatility.” – EIA Short-Term Energy Outlook Dec 2017
      • Gas production out of the Big Seven (Anadarko, Appalachian, Permian basins and Bakken, Eagle Ford, Haynesville and Niobrara shales) has increased every month since January.
        • Forecasted to reach 63.03 Bcf/d in January, up from 62.27 Bcf/d in December.
    • Demand
      • Gas consumption (excluding exports) this past injection season averaged lower than last year, primarily due to reduced power generation demand.
        • April – August demand from power generation averaged ~3.8 Bcf/ day lower vs. last year.
        • Early December demand was ~6% lower than last year.
      • La Niña conditions have arrived and likely to stick around:  NOAA predicting a weak La Niña for the remainder of winter 2017-18.
        • 10 of the last 12 weeks have been warmer than normal.

Gas Market Highlights:

  • Last week was the 6thstorage report and 5th withdrawal of the 2017-2018 Withdrawal Season.  Withdrawal (182 Bcf) was on the upper end of analysts’ expectations (107 Bcf – 186 Bcf).  Storage is now 183 Bcf below last year’s level and 84 Bcf below the 5 year average.
    • Year over year deficit has decreased 9.0% since the previous week.
    • Deficit under 5 year average has increased 211.1% from the previous week.

  • February 2018 NYMEX currently trading at 2.744 after opening at 2.646.

Weather Highlights:                                                                                                                                                                                                                                            

  • Next 7 days:
    • 2-6 below normal for most of the Southeast, 6-12+ below normal for northeast/central US,2-6 above normal for the West Coast.
  • Week following:
    • 2-9 below normal for eastern and central US, 1-3 above normal for the western US.

Note:  Although natural gas does not necessarily indicate where electricity pricing is at, it is good as a general barometer for electricity markets as a whole.  When gas gets expensive, so does electricity generated from natural gas.

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