- This quarter will see several long-awaited additions to Appalachian take-away capacity, including the 1.5 bcf/d Rayne/Leach XPress, the 0.2 bcf/d Adair Southwest and the 0.3 bcf/d Access South. After little monthly change in October, these additions should help to spur incremental growth. As Rover Phase 1a has demonstrated, not all supply coming to market will be truly incremental, and some existing supply will flow through these new pipelines. We still expect that Appalachia should provide supply growth exceeding 4 bcf/d this winter.
- Outside of Northeast, contributions from the Haynesville should approach near 1 bcf/d and the Eagle Ford, Bakken and Permian should contribute another 1.5 bcf/d of y/y gains. In addition, WCSB production continues to strengthen, and with a seasonal reduction in maintenance load for the winter months, 0.3 bcf/d of supply will be available for net export into the US.
- A return to 10-year normal demand levels should lead to 3.8 bcf/d of y/y heating gains from the residential, commercial and industrial sectors combined. But, looking at the past three years, normal weather does not appear to be a safe bet. If temperatures are 5% milder than the 10-year normal would lead to heating demand 2.5 bcf/d lower than our reference case, adding 380 bcf to a 1.5 tcf projected end-March 2018 inventory carryout. Weather that is 5% colder than normal will push heating needs 2.3 bcf/d above our reference case. In addition, colder weather could result in winter well-head disruptions of 70 bcf. In total, increased demand and production losses would push a notional end-March carry down toward 1.1 tcf.
- Outside of heating needs, structural demand (for industry, LNG and exports to Mexico) is expected to be 2.5 bcf/d higher y/y. LNG gains are driven by the four trains currently operational at Sabine Pass and assumed slow ramp up of volumes from Cove Point over Q1 18. Mexican gains will be dependent on domestic pipeline additions to enhance connectivity. Even so, our pipeline trade outlook does not assume any major shift from peak demand this summer.
Tying it together – storage and price outlook
- To be clear, normal weather underpins our 3.45 $/mmbtu outlook for the winter, as heating needs stacked on top of structural demand would trump even robust supply-side gains. Our normal weather reference case supports winter demand that would exceed that of the polar vortex in the 2013-14 winter by some 4 bcf/d.
- With so much hinging on normal weather, our 5% milder-than-normal and 5% colder-than-normal scenarios provide a placeholder on weather-induced market tightness/looseness. A mild winter, pushing end-March storage towards 1.9 tcf, will weigh on price formation. We would expect this to lead to a trading range more closely in line with that in place last year, with a floor near the lowest fuel switching trigger at 2.60 $/mmbtu. Conversely, colder-than-normal weather would require pricing more gas out of merit. An end-of-season carryout near 1.1 tcf would push the market into wintertime demand destruction. Such a scenario would take prices into the zone of fuel switching triggers at 3.77 $/mmbtu, with an ultimate upside on the next level fuel-switching trigger of just below the 4 $/mmbtu mark.