The market is now seeing a move away from hot summer temperatures into a more temperate autumn. Weather forecasts now show that after a hot first ten days of September, temperatures and demand will drop in absolute terms. This is due to seasonal effects, although forecasts are mixed as to whether temperatures will be above or below seasonal normal levels. Combined with indications of production increases, this left the US gas market in a fairly bearish mood and October contract prices fell by 2.4% w/w.
For the next seven days, however, the demand outlook will remain strong, as most of the country is forecast hot weather. We expect demand from the power sector to average just above 31 bcf/d over the coming week, higher y/y by 3 bcf/d. All of this could change, and cooler temperatures would mean those forecast increments will vanish.
Against that outlook, Reuter’s indicative data suggest August dry gas production (lower-48) hit a record high of 73.9 bcf/d, higher m/m by 0.4 bcf/d, and has now risen above 74 bcf/d. Production is leaving its long held range just below that level. This is surprising growth, with gas rig numbers continuing to fall (down by nine w/w). But increases in overall drilling activity will have helped associated gas production numbers. We note there is not a strong consensus in the market around August production numbers, with other estimates putting production as flat m/m, or only marginally up. However, stronger production growth would help to explain the more bearish moves seen in the market over the last two weeks.
The week’s 94 bcf injection number shines only limited light on those production numbers, as some of the growth was due to a reclassification of some gas in storage from base to working gas. Still, the increase makes an end of October storage inventory level near the 3.9 tcf level fairly likely—more than enough gas for any sort of winter the market might experience.
For next week, demand looks robust, but so does supply. Our provisional storage injection numbers of 77 bcf should also keep the market relaxed, as will the easing of national temperatures. Given this, we do not see upside to the 2.65 $/mmbtu level, for either cash prices or the month ahead contract. We do not see downside either, as this is a key fuel-switch trigger. The spreads to Henry, particularly in California, should continue to narrow and potentially switch to a premium, if El Niño brings as much rain to the coast as threatened. Northeast discounts should continue to narrow as well, as Marcellus takeaway capacity continues to expand with new pipelines opening this week. Upside risk comes if longer dated weather forecasts are revised to show temperatures going much higher than normal, despite easing in absolute terms.