Winter is coming

Published at 21:46 28 Sep 2018 by . Last edited 15:12 5 Nov 2018.

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  • US output has surged by some 5.5 bcf/d since April and is up by a whopping 10 bcf/d y/y this month. For the heating season, we anticipate gains of more than 8.0 bcf/d y/y in US output, driven by Appalachia but with Haynesville also providing additional volumes. In addition, associated gas volumes, which have helped drive growth throughout the summer, are also a mainstay in our reference case.
  • For the injection season, we expect rates of growth from Appalachia and Haynesville to slow given current rig activity and total US production sequential gains to effectively end. Capital expenditure levels as well as hedging values for 2019, which are below those in place in 2018, inform this view. Associated production remains the wildcard and currently our view on oil production is for 0.8 mb/d y/y growth in 2019.


  • For the heating season, we assume 10-year normal demand in our balances, which leads to an essentially flat y/y reading in the res-com sector. In the power sector, we anticipate 1.2 bcf/d y/y growth with another 2.3 bcf/d from structural demand growth (pipeline exports to Mexico, LNG feedgas and gas use in the industrial sector).
  • For injection season 2019, the massive y/y gains in the power sector seen this summer scale back to 0.2 bcf/d y/y. Structural demand will be at the fore, at a forecast 3.6 bcf/d higher y/y. Expected timelines for LNG export and Mexican infrastructure projects have so far been a seemingly moving target. Major Mexican pipeline projects have been chronically delayed and we consequently continue to take a conservative view on project ramp-up especially as downstream pipelines and demand-side projects have faced delays. Recent filings for pre-commissioning activity at Freeport LNG suggest the first two trains at that project could come online earlier than their September 2019 and January 2020 in-service dates. Meanwhile, Cameron LNG’s first train has only filed for commissioning activity on a gas turbine at this facility this week, which could risk that project’s timeliness.

Tying it together: Storage and price outlook

  • Our sub-3.3 tcf carryout for October 2018 raises significant concerns over peak day deliverability this upcoming winter. Within the past several trading sessions, the market finally appears to have responded. As we have argued for some time, while some financial participants are keying off the very healthy supply readings anticipated for this winter, physical players may have a different reaction given how tenuous deliverability could be. That distinction also then transitions to cash vs futures pricing, meaning that cash price this winter will have to price in deliverability when it is a concern on peak days.
  • Our balances under 10-year normal weather lead to an end-March inventory level near 1.45 tcf. Such a figure makes no allowance for winter wellhead disruptions, which have muted supply in recent winters and would bring that number even lower. As we outlined previously (see Insight: Winter outlook: deliverability vs availability, 24 September 2018), a 5% colder-than-normal scenario underscores the weather risk that comes with such a carryout. Making adjustments for increases in demand from res-com, industrial heating, power load, and price-related givebacks in the power sector, winter-wellhead disruptions, and an uptick in net trade with Canada, such a scenario puts end-March storage near 1.0 tcf and would spur winter prices toward $3.20-3.40/mmbtu. However, a 5% milder-than-normal scenario would start to make balances feel loose, pushing inventories toward 1.8 tcf, with price reverberations through the winter and into injection season 2019, with an injection season price on the order of $2.35/mmbtu.
  • If the defining fundamentals of this summer was the tug-of-war of production vs power, then the winter will be defined as production vs weather-aided demand. The following 2019 injection season should see a thematic shift as we expect to witness an end to the considerable sequential gains that have characterised the market of late, flattening expected production. While y/y output will be high, power burn growth will moderate significantly under normal weather. Structural demand does have project timing-based risks that could delay demand materialising so pressure on prices could remain predominantly downward. For injection season 2019, we maintain our outlook of $2.65/mmbtu on high supply, while risks to demand-side project timelines bias the risk profile to the downside. A concentration of Q4 19 and September 2019 in-service dates for projects, however, could make the close of 2019 see a bump in price.

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