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Will U.S. Natural Gas Prices Rise In Spring?

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Even though many cities across the nation hit record high temps yesterday, it's still hard to imagine that the Winter natural gas market is slipping away. As the last Winter contract, prompt month March expires on February 26. Prices have been at their lowest levels since June 2016. And now at 77-78 Bcf/d, record dry production is the lid on the market, with more pipelines to encourage more output this year.

The ~$2.55 price is proving to be a very strong support level, the floor for now. EIA has production outpacing domestic demand by about 3 Bcf/d both this year and next, compared to a 1 Bcf/d deficit last year (note: domestic demand doesn't include exports, which is why they are the true wildcard in the gas market going forward).

Yet, an upside correct seems plausible. Prices were up 6 cents yesterday to $2.61. At this low price, fuel switching from coal to gas in the power sector becomes very attractive. And technical indicators have the market closer to the 30 oversold threshold, with RSI below 40 since February 2. This is a signal that natural gas today is trading below the commodity's true value.

Residential and commercial gas demand, which factors in the heating sector that is so crucial this time of year, can account for 50% of all use in Winter before falling to 25% in Spring. Res/comm demand this month has been down 16% from January, and the Winter overall has been 12% colder than last year but 7% warmer than normal.

But, the upside for the gas market is still limited. The weather outlook for the rest of February isn't very supportive. There is some talk of a cold start to March, however, especially after the first week of the month. Coming withdrawal levels should be lower than average starting next week, and I think 1,500 Bcf is a good projection for where gas inventories will be at the end of Winter (end of March), below the five-year average of 1,700 Bcf.

Additionally, demand sinks during the coming shoulder season of April and May, when heating needs have subsided and cooling needs haven't fully kicked in. Spring gas demand is usually 35-40% lower than in Winter.

But, don't think gas prices cannot rise in Spring. This time last year prices were right where they are now, and would eventually rise to $3.42 on May 12 on regulatory news that construction of Rover pipeline would be delayed, fueling speculation that production would be curtailed. "A Single Pipeline's Taking U.S. Gas on a Rollercoaster Ride."

But, production today is a full 6-7 Bcf/d higher today than year-ago levels, so reaching last May's high will be much more challenging.

The next big question is sure to be "how hot is Summer going to be?" I'm not gonna give you a forecast on that. But, I will tell you the most bullish factor in the gas market today: storage is 23% below year-ago levels and 19% below the five-year average, making ongoing rises in output even more vital.

And know that increasingly, gas is our main source of electricity and powers air conditioning needs. From Q1 to Q3 this year, gas-based electricity will grow 30%. And I see ~10,700 MW of coal retirements coming this year, with gas being the primary fill-in.

Indeed, the U.S. gas market is tighter than it appears: the last time prices were this low in June 2016, we didn't have the massive export capacity that we have now. Our second LNG export facility is coming online in March, although at 0.8 Bcf/d of Cove Point in Maryland will be much smaller than the 3.5 Bcf/d liquefaction capacity of our only current export facility, Sabine Pass in Louisiana. And remember that the cheaper our gas gets, the more attractive it becomes to international buyers. Current piped gas to Mexico stands at 4.5 Bcf/d, but the actual capacity stands at 10.2 Bcf/d and will reach 14 Bcf/d by end 2019.

U.S. LNG exports are currently limited by a lack of export terminals, but that will be changing. Consider 2019 and 2020 the ramp-up years. U.S. LNG export capacity is predicted to reach ~9.6 Bcf/d by end 2019. U.S., Canada Face Off For LNG Dominance.

Data source: EIA

Data source: EIA