Injections ahead

Published at 18:54 28 Feb 2018 by

Supply

  • Flow readings over the course of February revealed that production failed to follow up on strong increases early in the month, with pipeline receipts showing a mid-month stagnation and only another uptick in the last several days. Nonetheless, production is still set to post a remarkable 6.8 bcf/d y/y gain.
  • Infrastructure delays downstream of the Permian will deepen Waha discounts, especially as the 1.5 bcf/d El Encino-La Laguna pipeline is not likely to enter full service until at least the end of the year. In addition, the expected piecemeal process of bringing online available portions of Rover Phase 2, together with compression additions to Atlantic Sunrise after the greenfield pipe enters service this July, are likely to backdate an Appalachian ramp-up to Q3.

Demand

  • The spectre of winter weather demand has now all but faded, foreshadowing a shoulder season in which underlying demand growth from our three pillars—pipeline flows to Mexico, LNG feedgas and gas use in the industrial sector—combined with power growth will fall below supply additions.
  • Downside risk remains to our forecast of 0.5 bcf/d y/y growth in cross-border pipeline flows to Mexico over the injection season due to a number of infrastructure delays. Given the expected timeline for LNG export facility additions, we project 1.5 bcf/d of y/y growth in feedstock demand—essentially all contributions from Sabine Pass and Cove Point. We forecast industrial demand to be up y/y by 0.5-0.6 bcf/d and 0.7 bcf/d if shoulder season heating needs are included. Together, these will peg structural growth at some 2.7 bcf/d higher y/y. When coupled with our expected gains from gas use in the power sector, on the order of 1.0 bcf/d, that pegs market growth at some 3.7 bcf/d y/y.

Tying it together: Storage and price outlook

  • Our projected end-March storage carryout is now 1.39 tcf, versus a 1.26 tcf forecast last month, which will also have a bearing on price. Indeed, the current forecast would essentially leave the market with 0.6 bcf/d more gas throughout the injection season than we envisioned last month. Not only does that buffer firmly place inventories well above anything considered a low threshold for end-March, there is limited weather risk to close the season. Consequently, we have revised down our injection season prices to average near 2.70 $/mmbtu (from 2.80 $/mmbtu last month) on a level of inventories that appears healthy versus low to start the injection season. While the market is currently focusing on a supply outlook that looks quite long this injection season, if that price point starts to foster too much in the way of demand-side gains in price-elastic power sector demand, an upward revision would be necessary.

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