- In the first week of November, production grew by nearly 1 bcf/d w/w, showing that the Appalachia spigot had not run dry. However, with no major takeaway additions scheduled until late December at least (Rover Phase 1b), we think Appalachia is unlikely to see output push significantly above the current record high of 27.5 bcf/d for the rest of the year.
- Nonetheless, the 76.1 bcf/d of lower 48 average production this month, as compared to 74.1 bcf/d in October, and volumes nearing 77 bcf/d this week, have led us to increase our December-March outlook to just over 6.0 bcf/d of y/y gains.
- November demand gains nearing 7.3 bcf/d y/y have more than offset the strong pace of production gains. Of that demand increase this month, 4.0 bcf/d y/y has come from heating, with an additional 2 bcf/d emanating from structural demand (for industry, LNG and exports to Mexico).
- There is a strong possibility for growth in heating along these lines for the remainder of the heating season, especially considering the low GWHDD tallies recorded in January and February last year. Our reference case, tied to normal weather, currently pegs heating needs (res-com and industrial sector) for December-March at 3.8 bcf/d higher y/y. For this same period, structural demand is expected to be 2.9 bcf/d higher y/y. LNG gains of 1.6 bcf/d y/y are driven by the four trains currently operational at Sabine Pass and assumed ramp-up of volumes from Cove Point over Q1 18. Mexican gains of 0.6 bcf/d y/y will be dependent on domestic pipeline additions to enhance connectivity. Even so, our pipeline trade outlook does not assume any major shift from peak average demand this summer of 4.5 bcf/d. All in, we expect total demand to grow 8.3 bcf/d.
Tying it together – storage and price outlook
- With nearly half of our anticipated heating season demand growth dependent on heating (and normal temperatures), a lot is riding on weather this season. Cash prices in the last full week of November took a wild swing, trading as low as 2.82 $/mmbtu, but it still may be too early for market bulls to throw in the towel. Last November, cash prices averaged near 2.50 $/mmbtu, but the December cash market averaged near 3.60 $/mmbtu.
- Our heating season pricing is calling for a 3.35 $/mmbtu level and a Q1 18 price just over 3.45 $/mmbtu with an end-of-season inventory on the order of 1.55 tcf. A 5% milder-than-normal scenario could easily lead prices to drop to the lowest of the fuel switch triggers, which currently sits at 2.7 $/mmbtu. A colder-than-normal scenario could push prices towards the higher triggers of 3.6 $/mmbtu and 4.00 $/mmbtu. At that high level, the drop in power sector demand would be sharp enough to balance the market in most of the coldest weather scenarios.