Record US gas storage weighs on fundamentals

OREANDA-NEWS. April 29, 2016.  The record amount of US natural gas in storage will keep a lid on prices through 2017 despite encouraging signs that producers are beginning to curb output and demand from power generators, industrial customers and exports is rising.

A stockpile of nearly 2.56 Tcf is clouding prospects for higher prices, Gelber & Associates president Art Gelber said at the Argus US Natural Gas Markets conference in Houston today.

Current gas in storage is more than 48pc above the five-year average for late April, according to Energy Information Administration data released today.

"So much gas in storage is staring us in the face that it will make it hard for the underpinnings of bullish fundamentals to come to the forefront in 2016, and maybe 2017," Gelber said.

The gas market entered the 2015-16 winter season with a record 4 Tcf in storage and the overall lack of prolonged cold weather left nearly 2.5 Tcf in storage at the end of March, almost 1 Tcf above the five-year average, said Jed Howard, director of business development for storage at Spectra Energy.

Power plants switching from coal to cheaper gas was one of the primary drivers in balancing the gas market from 2011 to 2013 as production soared, but no longer.

"It is not a driver anymore," said Gelber. "It is all switched."

LNG exports, gas exports to Mexico and some growth in industrial gas demand will be the price drivers going forward. Mexico demand is up 1 Bcf/d from a year ago, Gelber said, but the economic slowdown has led to a pullback in expected growth in industrial demand for gas.

Gas prices will likely stay between \\$2.00-\\$2.50/mmBtu this year to avoid putting too much gas into storage, he said.

On the supply side, US gas output will decline very slowly despite drastically reduced capital spending as producers rely on wells that have been drilled, but not completed and brought to market. But the supply potential for so-called "DUC wells" is not infinite, said Bernadette Johnson, managing partner of Ponderosa Advisors.

Johnson said many of the drilled, but uncompleted wells will be exhausted by the end of 2016.

"That is when we will see a signal for higher prices," Johnson said. Prices could rise to \\$3.25/mmBtu or higher, but will not reach \\$5/mmBtu, Johnson said.