- Sequential gains to Lower 48 production have been modest in Q1 18, but large y/y gains have lulled the market into a state of complacency, with production averaging nearly 7.5 bcf/d higher y/y. Maintaining that pace will be easy in the April-May shoulder season, even with only moderate sequential growth, given last year’s depressed baseline.
- Timing issues continue to surround Rover Phase 2, but Appalachian takeaway will still see a sizeable increase when Atlantic Sunrise comes online this summer. Infrastructure concerns are more centred on the Permian, where significant underutilisation of pipeline capacity flowing to Mexico—due to pipeline delays south of the border—will leave the region looking constrained as early as this summer and consequently lead to sizeable discounts at Waha.
- Withdrawal activity is forecast to last at least into the first week of April, but even a significantly higher-than-normal GWHDD count will only see a measured response in res-com and industrial heating this late in the season. Beyond the first few weeks of April, the shoulder season’s underlying structural demand growth from our three pillars—pipe flows to Mexico, LNG feedgas and industrial gas use—together with power burn will still fall below supply additions.
- We expect growth in power sector gas demand near 1.8 bcf/d y/y over the injection season. Our forecast is primarily driven by a return to normal weather after a milder 2017 injection season. Some of the underlying growth in power demand will be met by continued gains in renewable output. Hydro generation should be closer to historic averages, which would be lower compared to the high levels of Q2 17. Lower hydro generation could potentially offset increased nuclear, wind and solar generation. So higher gas burn this summer will be driven by the post-2017 injection season retirement of more than 10 GW of older gas/coal-fired capacity and the start-up of new combined-cycle plants throughout the Eastern US.
Tying it together: Storage and price outlook
- End-March storage is on track to sit just above 1.35 tcf. That figure—certainly a low level to start the injection season—has still not been enough to prop up cash or summer prices. Even with the colder-than-normal weather seen in March and forecasts suggesting some minor withdrawal activity could stretch into the second week of April, cash prices have moved back down into the 2.50s- low 2.60s $/mmbtu even before the start of the injection season. While the market has been complacent on headline production growth figures, that low end-March carryout will still require ‘latent demand’ in the form of a hefty call on supply for storage injections, which we forecast will average around 2.0 bcf/d higher y/y.
- Current Henry Hub cash prices are low and a large number of regional hubs are trading at discounts to Henry Hub. The large underlying need to inject into storage will provide some support for prices, so for the injection season we maintain a HH cash price outlook near 2.70 $/mmbtu. A further move down in price would only serve to bring some of the least efficient gas power plants back into the money, which would slow injections and could lead the market to grow concerned about supply availability for next winter, stimulating an upward re-pricing.