Winter worries

Published at 19:19 21 Dec 2017 by

Supply

  • For most of December, L48 nat gas production has essentially been treading water. This week daily production has lifted to a new record near 77.5 bcf/d, with Appalachia readings near 27.5 bcf/d, only marginally higher (0.1 bcf/d) from previous peaks despite Phase 1b of Rover going into service over the weekend.
  • Even with these readings, y/y production growth this month should still be near 6.7 bcf/d. For Q1 18 as a whole, our reference case includes 7.5 bcf/d of y/y growth, driven by a whopping 5.0 bcf/d y/y increase in Appalachia receipts. Permian growth near 1.6 bcf/d y/y and Haynesville adding some 1.8 bcf/d will also be major contributors.

Demand

  • With the GWHDD tally for the first 15 days of December falling nearly 5% below the ten-year normal benchmark, comparisons looked bearish not only versus normal but versus the colder-than-normal December 2016 analogue. However, given the abnormally low GWHDD tallies recorded in January and February 2017, 10-year normal weather in January and February 2018 should easily result in a y/y rise, with our Reference Case calling for res-com gains of nearly 5 bcf/d next quarter and another 0.6-0.7 bcf/d from industrial heating needs.
  • Outside of heating needs, structural demand growth should contribute 2.4 bcf/d y/y in Q1 18. Mexican flows are still subject to ongoing infrastructure delays. Nonetheless, we anticipate they will grow y/y by 0.6 bcf/d as pipeline flows have picked up in recent weeks. LNG feedgas for exports should rise given the current high levels of utilisation at all four trains of Sabine Pass and the expected inaugural cargo from Cove Point being produced soon. If Cove Point has a smooth commissioning, there could be upside to our outlook given global spreads are encouraging maximum US exports. In addition, we anticipate 1.2 bcf/d of y/y gains in the power sector. Altogether, our reference case calls for demand to be higher y/y by just over 9.5 bcf/d in Q1 18.

Tying it together – storage and price outlook

  • With more than half of the anticipated demand gains in Q1 18 coming from the heating requirements, any deviation in temperatures from normal translates into price risk. As the first fifteen days of December saw around 5% fewer GWHDDs than normal, cash prices fell from a 2.99 $/mmbtu average in November to just below 2.80 $/mmbtu in the month to date. Without a strong cold snap in the first six weeks of 2018, any ‘three-handle’ $/mmbtu pricing for the season would likely be off the table. However, with three full months left of the heating season, it is too early to write-off winter just yet. Looking ahead to the week ending 29 December, weather forecasts suggest tightening fundamentals and we currently predict a 195 bcf storage withdrawal for that week, up from a 76 bcf withdrawal in the year-ago week. Higher y/y storage calls could continue for weeks given mild weather last January (12% milder than the 10-year normal) and February (28% milder than the 10-year normal). Given the depths the market has plumbed and technical signals that still appear to be oriented toward downward momentum, we have revised our Q1 18 outlook to 3.20 $/mmbtu, which is on par with the next highest fuel-switching trigger after the 2.70 $/mmbtu zone. Normal weather would still materially tighten balances, but the market will still need that cold weather signal to be propelled forward from its current trading zone.
  • Given the mild start to this month, our reference case end-March 2018 storage carryout is just under 1.65 tcf, an increase of around 100 bcf from last month’s outlook. If our previous forecast range of 1.4-1.5 tcf, which we maintained throughout the injection season, was a ‘Goldilocks’ carryout (neither too high nor too low), our upwardly revised 1.65 tcf carryout is now decidedly on the high side, particularly given the volume of expected production growth throughout the summer.

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