Winds of change

Published at 16:58 29 Sep 2017 by

This North America Outlook publication has been redesigned as part of our enhanced North America natural gas service. We welcome your feedback on the new format.

Supply

  • Appalachia, the prime driver of y/y dry natural gas production growth, should see another step up in production rates as more takeaway infrastructure comes online in Q4 17. With key pipelines seeing repeated delays—especially this year’s largest addition, the 3.25 bcf/d Rover project—the biggest risks are around how fast the pipelines come online, get filled, and result in truly incremental gains, rather than diverted, supply.
  • The spotlight has been on Rover thanks to its size and the publicity it has received over the environmental issues that have caused delays. But, a handful of other infrastructure projects scheduled to enter service in Q4 should also help to debottleneck northeast supply, including the 1.5 bcf/d Leach Xpress. Beyond Rover, we expect most of the 3.5 bcf/d of pipelines under construction in Appalachia to come online by year-end. However, only about 1.7 bcf/d of the added takeaway capacity will be filled with new production next quarter in our reference case.
  • The Permian and Haynesville will both help boost production, together adding 1.6 bcf/d more y/y. Over Q4 17, we forecast total Lower 48 production will be higher y/y by 4.4 bcf/d.

Demand

  • Ten-year normal weather should prop up heating demand significantly in both the residential-commercial and industrial sectors. However, given the uneven mix of gas-weighted heating degree days (GWHDDs) last year, normal temperatures would mean the heating season would start with a nearly 5.0 bcf/d demand increase in November, followed by a decline in December of 1.3 bcf/d. For the heating season, our reference case heating demand is 3.6 bcf/d higher y/y.
  • Growth in structural demand (industrial sector, LNG exports, Mexican pipeline flows) has been strong, increasing at 1.3bcf/d in Q3 despite being depressed by hurricane impacts. In Q4, we expect those gains to rise to 2.3-2.5 bcf/d. Incremental y/y pipeline feed for LNG exports should average 1.7 bcf/d in Q4 17, given the start-up of Sabine Pass Train 4.
  • Mexican net exports have been pressured lately (notwithstanding the hurricane impact) as domestic bottlenecks have increased reliance on LNG and fuel oil in the electric sector to backfill pipeline inflows. In Q4, the call on US supply will struggle to grow above recent levels as more infrastructure is not scheduled to come online until Q1 18. During Q4 18, flows should average 4.4-4.5 bcf/d, which is a 0.5 bcf/d y/y rise.

Tying it together: storage and price outlook

  • Winter balances appear tight, especially when we look at the average of the monthly balances across the heating season, but there are important differences between individual months. Demand will likely be up y/y in November given last year’s abnormally mild conditions, but that will shift in December, given assumptions of reversion back to 10-year normal conditions.
  • We do not think that current balances will warrant additional gas demand from the power sector.  As such, we forecast that prices will need to adjust upwards from the current curve toward 3.30 $/mmbtu levels, as less gas is generally going to be around to go into power across the coming winter.

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