The natural gas market is looking rather tight, even as U.S. production continues to set new records.
Inventories fell sharply last winter, leaving the country a little light on stocks heading into injection season. That did not concern the market much, with record-setting production expected to replenish depleted inventories.
However, the past six months has not led to surging stockpiles, and inventories replenished at a much slower rate than expected. We are about to enter the winter heating season with inventories at their lowest level in 15 years. For the week ending on October 19, the U.S. held 3,095 billion cubic feet (bcf) of natural gas in storage, or 606 bcf lower than at this point last year, and 624 bcf below the five-year average.
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The reason for this is multifaceted, with seasonal weather playing a role, but also structural increases in demand. “Hot summer weather, LNG liquefaction demand, exports to Mexico, and the industrial sector have all mitigated the impact from a 8.7 bcf/d YoY production growth surge this summer,” Bank of America Merrill Lynch said in a recent note. Low inventories and potential deliverability risks led the investment bank to hike its price forecast for the first quarter of 2019 to $4 per MMBtu, up from a prior estimate of just $3.40/MMBtu.
Coal shutdowns have led to a lot of fuel switching. Moreover, new gas-fired power plants have opened up and continue to do so. The U.S. also became a sizable LNG exporter in 2016, and exports will continue to climb in the years ahead with more terminals coming online. New pipeline interconnections with Mexico should also lead to more shipments from Texas to the U.S.’ southern neighbor.
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