Winter is dead- Does summer have a pulse?

Winter 2016-2017 has thus far failed to produce very much in the way of cold weather. In fact, last week’s draw of 89 Bcf was the 4th smallest February withdrawal ever recorded. Some analysts are even estimating a net injection for the week ending February 24th. With very little time left in the traditional withdrawal season and forecasts calling for normal to above-normal temps for March, the outlook for NG in the near term is fairly bleak.

If we do have mild weather for the rest of the winter, what would that mean for the summer injection season? Will we have enough capacity in storage? Will coal-to-gas-switching or exports help soak up additional supply? What could happen to prices along the way?

To calibrate our perspective, here is some history, including the total and weekly average injections each year since 2010.

Source: EIA

At this point, due to the conditions described in the first paragraph, we’re likely to end the winter with high inventory, similar to 2012 and 2016. Both years had robust coal-to-gas switching that helped balance the summer load and avoid too much crisis. In 2012, the October NG futures contract settled at $3.023 and in 2016 the Oct contract rolled off at $2.952.

So if the 2017 injection season starts off at 10% above the 5-year average (we currently sit at 7% above, before any unprecedented February injections) and the theoretical limit is 4.0 Tcf, how would this summer compare?

Source: EIA

Source: EIA

We have an ability to inject around 56 Bcf per week this summer, which is well below average, but in line with those two years. What is meaningful about 2012 and 2016 is that they were both “saved” from a true glut by coal-to-gas switching for power generation. I think it’s therefore safe to assume that prices will need to be at a level to justify this again.

Which would be the end of this analysis if conditions were otherwise exactly like 2016. But there are two significant differences, both of which are bearish on the overall supply/demand picture.

First, dry gas production is growing. The EIA forecasts a 1.3 Bcf/d year on year increase from 2016 to 2017, on the way to a further 4.1 Bcf/d of growth by 2018.

Second, utility-scale solar and wind installations are projected to take more market share from gas than ever. According to the EIA, 10.5 GW of new wind and solar power generation capacity will have come online between November 2016 and September 2017. Given that we have to already assume coal power generation is backed off as much as possible in favor of gas burn, This is likely to come out of gas demand. Depending on how one calculates heat rates and capacity factors, this summer’s renewable additions could mean around 1.5 Bcf/d of gas demand lost.

All told, that could be another 2.5-3.0 Bcf/d more length in the gas market. Pipeline export capacity to Mexico will increase by 4 Bcf/d during the year. BTU Analytics does a great job of breaking down the total by pipeline, as well as projecting actual demand growth south of the border. According to their analysis, demand for exports to Mexico for power generation is only expected to grow 205 MMcf/d this summer, though the stage is set for further increases in later years as more infrastructure comes online downstream.

So it looks like LNG exports will serve as a relief valve this year. LNG exports in 2016 averaged 571 MMcf/d with only 1 train operational at Sabine Pass. This year there could be 3 trains online. Train 2 is already operating, and Train 3 is expected to be fully online in June, with Train 4 just behind in August. However, testing and early production volumes will flow before those official dates. Based on previous flows before each train was fully commissioned, and the fact that current flows to Sabine Pass are average around 2 Bcf/d, it’s safe to assume that summer 2017’s LNG demand will be roughly the full 2.4 Bcf/d of 4 trains at Sabine, which would be 1.8 Bcf/d of incremental gas demand year-on-year.

That leaves the gas market close to balanced, but with very little wiggle room in the case of mild weather. The market has a lot of potential to be very long, which could depress prices even further and start pushing back on production and/or rebuilding DUC inventory.