US gas prices to languish without rising demand

OREANDA-NEWS. April 11, 2016. US natural gas prices will remain low in 2016 amid high inventories unless production declines or hot summer weather spurs demand.

The US gas market faces spring inventories surpassing the seasonal record set in 2012 following a warm winter. Prompt-month prices are revisiting spring 2012 levels, trading near \\$2/mmBtu. But unlike 2012, electric utilities may not be able to absorb that supply glut and bring the market back into balance. That could mean gas stocks breaking yet another record ahead of next winter, prolonging the downturn in prices.

"The demand is going to have to come from somewhere or producers will have to curtail output," said Kyle Cooper, managing director for the energy advisory Criterion Research.

The US power generation sector was a key source of gas demand when prices fell to 10-year lows below \\$2/mmBtu in spring 2012. Utilities used gas instead of coal to meet customer needs. But spot prices at the Henry Hub have averaged below \\$2/mmBtu for the entire 2015-16 heating season, encouraging rampant coal-to-gas switching and exhausting some demand.

Gas use for power surpassed coal for seven of the 12 months in 2015 as utilities scrambled to take advantage of low prices. But coal still topped gas, remaining the most widely used fuel for US power generation. Gas should overtake coal this year, according to the US Energy Information Administration (EIA), but that demand increase should be modest. The EIA projects that the electric power sector in 2016 will use a record average of 27.29 Bcf/d (773mn m?), an increase of about 790mn cf/d, or 3pc. In contrast, power sector consumption in 2012 was up by a much larger 4.15 Bcf/d from a year earlier.

High US coal stockpiles and the planned retirement this month of 2.8GW of coal plants could derail some gas demand this spring. Operators may ramp up those plants ahead of retirement to diminish coal stockpiles that exited 2015 at 25-year highs, analysts with Barclays said this week.

Overall levels of gas consumption have increased since 2012. The US in 2015 used 75.27 Bcf/d, up by about 8pc from 2012. But US onshore production has soared over that period, rising by 16pc to 74.36 Bcf/d. Gas output is forecast to increase this year by 1.5pc, the EIA said.

Production could still falter amid deep spending cuts and a sharp downturn in drilling. The US rig count this week dropped to 443, a decline of 55pc from a year earlier, according to oil field services provider Baker Hughes. Large independent producers such as Chesapeake Energy and Devon Energy have slashed oil and gas development plans this year. Southwestern Energy has moved rigs to the sidelines until prices recover.

Despite the downturn in drilling US production growth has remained robust as producers work through a backlog of uncompleted wells, improve well designs and pursue only the most lucrative drilling opportunities. If there is a production downturn it could bleed down inventories that last week reached a seasonal high 2.48 Tcf, or 54pc above the five-year average.

Prices could snap back if those inventories fall, according to the energy investment bank Tudor Pickering Holt.

The investment bank this week cut its forecast for Henry Hub gas prices in 2016 to \\$2.25/mmBtu, down by 15pc from its previous outlook, on a mild winter. But it raised its 2017 gas price outlook by 15?/mmBtu to \\$3.65/mmBtu amid the prospect that low prices will drive production declines.

Meteorologists with the private forecaster MDA Weather Services are predicting that the summer should run hotter than normal thanks to the development of a La Ni?a weather pattern. La Ni?a patterns are related to cool waters in the Pacific that can lead to above-normal US temperatures and contribute to storm activity in the Atlantic basin.

The summer could be 9.6pc hotter than the 30-year average and slightly hotter than the 10-year average and the summer of 2015.

The upcoming summer is not favored to repeat the heat recorded in 2012 but that risk should not be discounted either, the forecaster said.