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Record highs for storage and demand
2016 was a unique year for the energy industry, as changing market conditions spurred a number of new record highs and lows on multiple fronts for both gas and power.
On the strength of low natural gas prices resulting from one of the mildest winters since 1950 as well as positive economic conditions, power generation gas demand increased to a record high last year. While total gas consumption averaged 75.1 Bcf/d for 2016, a 4.2 percent year-over-year increase, per the U.S. Energy Information Administration (EIA); power burns reaching an all-time daily high of 40.9 Bcf/d in August. The power burns helped to manage storage injections following March’s record-setting storage levels. A new record was set in November, however, as gas storage reached 4,047 Bcf.
Mexican and global exports surge
The role of exports also made an impact on supply-demand conditions. Global exports surged with the February commencement of liquefied natural gas (LNG) send-outs from Cheniere Energy’s facilities in Sabine Pass, Louisiana. Sabine Pass sent out a record 42.8 Bcf of gas in December, according to, EIA in January. Meanwhile, exports to our southern neighbor Mexico grew by approximately 0.75 Bcf per day year-over-year to a record 3.6 Bcf/d in 2016, including a new daily record high of 4.2 Bcf per day.
Production stalls outside the Northeast
While gas production in the Northeast hit a record high 22 Bcf/d in 2016, it dipped across the board. In total, production declined by roughly 1.8 Bcf/d from 2015, according to the EIA’s January 2017 short-term energy outlook (STEO). Oil rigs declined to 330 in June, but rebounded to finish the year at 525. Gas rigs declined from 162 at the start of the year to a low of 81 in August, but finished the year at 132. This rebound in rig counts could help production recover in 2017.
Overall, increased demand did not prove to be a pain point for customers. Increased production and storage capabilities, in conjunction with an unseasonably warm winter, helped to suppress prices with Henry Hub next day gas averaging $2.48/MMBtu for 2016. The Henry Hub averages, as well as declining regional gas prices in New England, resulted in year-over-year DA Index power average decreases (see chart below).
Shale continues to disrupt the energy industry
Over the last several years, the shale revolution has brought tremendous growth in supply which has fundamentally altered the energy landscape. As natural gas continues to be a growing source of demand for power generation in the U.S., growing markets in North America (i.e., Mexico and Canada) and abroad will lead to continued market alignment in the years to come.
In 2016, the scale of shale discoveries at recoverable prices continued to impress the market. In November, the United States Geological Survey discovered 20 billion barrels of oil and 1.6 billion barrels of natural gas at the West Texas Wolfcamp Shale formation. The assessment is the largest on record and the resources are believed to be nearly fully recoverable.
Will the Market See Tighter Conditions in 2017?
After strong residential and commercial (R&C) heating space demand in December, the market saw a storage surplus flip to a deficit early in the winter. The current inventory stands 13 percent below year ago levels, while production has been averaging below 71 Bcf/d so far in January, per the EIA Jan. 18, 2017, EIA natural gas update mentioned above. Storage will be tighter at the end of March vs. year ago levels. Along with several other factors this could lead to a tighter supply and demand balance for 2017.
Here are some of the key indicators to watch for gas and power price support in 2017.
End-of-March storage levels: The EIA January 2017 STEO is currently estimating 1,745 Bcf at the end of March, which would be -3.3 percent below the five-year average. Natural gas inventories are projected to finish October at 3,667 Bcf, or 5 percent below the previous five-year average for end-of-season inventories.
Dry gas production: Dry gas production is expected to increase over the next two years, rising by 1.4 Bcf/d or 2.0 percent in 2017 and by 2.8 Bcf/d or 3.8 percent in 2018, per the EIA’s Jan. 10, 2017, report referenced above.
LNG exports: The same EIA report tells us that LNG exports are expected to average 1.4 Bcf/d in 2017 as Sabine Pass makes train No. 3 operational. Currently in commissioning phase, it is anticipated to come online in the first half of 2017. Per the EIA, recent pipeline feeds into Sabine Pass have been averaging 6 Bcf/d from trains No. 1 and 2, implying EIA could be underestimating demand at Sabine Pass.
Exports to Mexico: These are expected to continue to grow in 2017, from an average of 5 Bcf in 2016 due to rising power generation demand and flat production in Mexico. In 2017, an additional 3.5 Bcf/d of pipeline capacity from the U.S. is expected to come online, but not all of it will be utilized.
Industrial demand: Industrial consumption of natural gas grew by 1.9 percent in 2016, per the Jan. 10, 2017, EIA report, which was largely the result of low prices in the first half of the year. Demand was additionally driven by multiyear-low natural gas prices that resulted in new investments in fertilizer and chemical plants in the U.S., which have made these plants economical once again. For 2017, industrial demand is forecast by the EIA to grow by 0.6 percent.
Tighter production year-over-year, along with a winter that has been colder than last year and closer to the 10-year normal, has helped to rebalance gas supply and demand in the short term and with it the power markets as well. How the balance of winter plays out with respect to R&C heating space demand will have a significant impact on what happens the rest of this year. The move in gas prices to above $3/MMBtu, since December could lead to higher rates of production later in 2017.
Constellation is here to help
The energy industry is subject to a tremendous number of constantly fluctuating variables. As such, it is important to stay current on market conditions. But there is one constant — Constellation’s commitment to help you manage energy risk. No matter how the energy industry changes, Constellation will always help educate customers to make informed energy choices. Click here to learn more.