The natural gas market is teed up for a price rally throughout 2017 as natural gas demand continues to grow throughout the year from new LNG export trains and increased pipeline sendout to Mexico. Due to the reduction in upstream investment throughout 2015 and 2016, North American natural gas production is struggling to keep pace with the demand additions to refill storage. The only question remaining now on the future for Henry Hub natural gas prices is just how high do they need to be to keep storage near normal levels in October 2017. Back in December of 2015, we hypothesized how $30 crude could lead to $6 natural gas prices. However, a warm start to the winter of 2016/2017 took off some pressure. In addition, announced OPEC cuts pushed oil prices higher and the Permian rig count responded, consequently the additional associated gas from oil focused drilling has helped the outlook for the storage balance in 2017 not be so tenuous as to require a $6 Henry Hub natural gas price. But going forward, what levers will need to be pulled to balance the market? BTU Analytics’ new monthly Henry Hub Outlook report delves into those very issues to quantify the future of Henry Hub natural gas prices while highlighting the risks to how the benchmark natural gas price evolves.
Natural gas storage levels remain the focus of natural gas traders and the reduction in surplus levels and recent swing to deficit to the five-year average have sent natural gas cash prices and futures prices back above the $3.00/MMBtu mark.
As you can see from the above chart, the magnitude of the storage surplus or deficit strongly correlates with deviations from the marginal cost to produce natural gas in any given period. From 2005-2008, natural gas prices trended around the $6 level as Rockies and conventional production set the marginal price with extreme volatility above and below that level due to Hurricanes impacting offshore natural gas supply. As a result of the shale and pipeline boom that those high prices spurred, natural gas prices have been much more range bound between $2 and $5 with storage surplus or deficit dictating the variance from the average of $3.46 since January 2010.
As we go into 2017, the natural gas market is adding new sources of demand. Sabine Pass recently began commissioning Train 3, increasing natural gas demand for LNG exports to nearly 2.1 Bcf/d from a 2016 average consumption of 0.64 Bcf/d.
With the start-up for Train 4 slated for April 2017 and additional terminals coming online in 2017, LNG sendout could reach 4.0 Bcf/d by year-end. For a complete list of terminals, project timing, and expected send-out by train see our Henry Hub Outlook.
In addition to ramping LNG volumes, Mexican exports have remained robust as under-investment in Mexican oil and natural gas production has resulted in severe declines in PEMEX production throughout 2016. See chart below.
Mexican natural gas production has declined just over 0.7 Bcf/d during the course of 2016 or about 12%. That accounts for about 70% of the increase in natural gas exports through October 2016, which were 1.1 Bcf/d higher than in October 2015 (last official export numbers from EIA). Production declines in Mexico do not show any signs of slowing down soon either. According to Baker Hughes International Rig Counts, Mexican drilling rigs have fallen from nearly 100 rigs in early 2014 to just 18 rigs in December 2016, and of those, only five were not drilling for oil. New export pipelines and power plants are expected to come online through 2017 providing additional support for sendout in 2017.
With all the increases in demand from LNG and Mexico, US consumption of natural gas in the power sector will become increasingly less competitive with coal-fired generation in 2017 as natural gas prices rise, but can coal producers ramp fast enough to satisfy potential gas-to-coal switching? Can Permian and Haynesville production add a big enough boost in 2017 to stave off storage shortages? Or will old man winter throw a wild card in February and March? For more on BTU Analytics’ expectations on natural gas production, natural gas demand, and natural gas price forecasts, request a sample of our new Henry Hub Outlook report or attend the BTU Analytics What Lies Ahead 2017 Conference in Houston on February 8, 2017 in Houston, TX.