Energy Market Update - Early February

Published: February 8, 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.)
      • 20,000MW scheduled to come online in 2018.
    • 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 beginning commercial operations Q12018.
  • Market will turn bullish quickly depending on weather.
    • Attention is on cold weather forecasts and the associated heating demand (Heating Degree Days.)
      • Natural gas prices have recently rallied after sustained cold temperatures – storage is now close to the bottom of the 5 year range.    

 

Reasons to Wait:

  • With natural gas production growth projected in 2018 and significantly higher rig counts versus last year, the market could fall if incremental demand doesn’t keep up.
    • Production
      • 181 gas rigs (-7 vs last week) vs. 145 gas rigs last year.
      • “Dry natural gas production is forecast to average 80.4 billion cubic feet per day (Bcf/d) in 2018, a 6.9 Bcf/d increase from the 2017 level, which would be the highest year-over-year increase on record.” – EIA Short-Term Energy Outlook Jan 2018
        • Production currently at an all-time high:  Feb 2018 lower 48 production is currently averaging ~7 Bcf/d higher than Feb 2017.
      • Gas production out of the Big Seven (Anadarko, Appalachian, Permian basins and Bakken, Eagle Ford, Haynesville and Niobrara shales) has increased every month for the last year.
        • Forecasted to reach 64.07 Bcf/d in February, up from 63.18 Bcf/d in January.
    • Demand
      • Smaller than normal withdrawal expected on today’s storage report.
        • Seeing estimates of ~116 Bcf withdrawal (last year – 142 Bcf, 5 year avg - 151 Bcf)
      • La Niña conditions have arrived and likely to stick around:  NOAA predicting a weak La Niña for the remainder of winter 2017-18.
        • Warmer weather expected in the medium/long-term forecasts – suggesting ongoing demand weakness.
        • Anticipation that end-of-season storage will be healthier than previously expected.

Gas Market Highlights:

  • Last week was the 12thstorage report and 11th withdrawal of the 2017-2018 Withdrawal Season.  Withdrawal (99 Bcf) was in line with analysts’ expectations (87 Bcf – 119 Bcf). Storage is now 526 Bcf below last year’s level and 425 Bcf below the 5 year average.
    • Year over year deficit has increased 1.3% since the previous week.
    • Deficit under 5 year average has decreased 12.6% from the previous week.

  • March 2018 NYMEX currently trading at 2.737 after opening at 2.702.

Weather Highlights:                                                                                                                                                                                                                                            

  • Next 7 days:
    • 0.5-6 above normal for the West and southeastern US, 1-6 below normal for the Northeast and central US.
  • Week following:
    • 0-2 above normal for eastern US, 2-6 above normal in the West.

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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