American Oil and Gas Reporter - May 2017 - 42

SpecialReport: Market In Motion
The market exited the first-quarter 2016 from one of the most
bearish winters on record, with more than an 800 Bcf storage "surplus" compared with the five-year average and 1 trillion cubic feet
more than the prior year. Nevertheless, by year's end, the market not only had managed to wipe out the surplus, but also ended net short on supply for the year and prices were approaching
$4.00 an MMBtu in December. Both the supply and demand sides
of the balance equation contributed to this remarkable shift.
In 2016, total supply (including imports) averaged 77.5
Bcf/d, down 1.3 Bcf/d from 2015. Total demand (including exports) averaged 78.5 Bcf/d, up 1.3 Bcf/d year over year. So the
resulting net balance of supply minus demand went from positive 1.6 Bcf/d in 2015 to negative 1.0 Bcf/d in 2016. In other words,
the gas supply and demand balance averaged 2.6 Bcf/d "shorter supply" in 2016 versus 2015.
On the supply side, 2016 U.S. gas production contracted by
1.8 Bcf/d, posting the decade's first year-on-year decline. Lower rig counts finally caught up to producers that had, until then,
managed to maintain or grow production by drilling better and
faster with fewer rigs, while Northeast capacity constraints also
helped flatten Marcellus Shale growth.
Tightening the balance further was the fact that demand rose
about as much as production fell. While mild weather stunted residential and commercial heating demand, demand in almost all
other sectors climbed-to record levels in many cases-spurred by
lower prices and export capacity additions. A standout was the
rapid rise of new demand from liquefied natural gas exports, which
commenced in February 2016 and quickly grew to more than 1
Bcf/d by the start of 2017.
Bullish Balance
Given the balance, 2016 ended on a bullish note and prices
seemed to be on their way to $4.00 an MMBtu for the first time
in two years. That did not last long, however. The bullish sentiment was squashed by extremely mild weather in the first quarter of 2017, which proved even milder than in 2016. But the bulls
have hung on nevertheless. While prices retreated in the face of
unseasonable January and February temperatures, they have remained in the $3.00 an MMBtu range heading into the spring/summer refill season. That is because the same bullish balance that
helped prevent storage constraints in 2016 still lurks beneath all
the mild weather.
In late February, supply was 3.5 Bcf/d longer year to date versus the same period in 2016. While supply was averaging 3.1 Bcf/d
lower (primarily lower production) demand was down even
more-an astonishing 6.6 Bcf/d year on year-resulting in the extremely bearish balance of 3.5 Bcf/d. But when the January and
February 2017 residential/commercial demand volumes are
substituted with 2016 or five-year average residential/commercial volumes for the same period, a very different balance emerges:
one that is short on supply by close to 2.0 Bcf/d. In other words,
strip away the bearish effects of the warm winter weather and assume even average temperatures and the supply/demand balance
easily flips from net bearish to net bullish.
Moreover, since late February, weather has turned less bearish, and that underlying bullishness is now apparent. A look at
the year-to-date balance at the end of March, for instance, shows
a supply shift within one month's time from being 3.5 Bcf/d long
in February to very slightly (0.1 Bcf/d) short. Looking at the No42 THE AMERICAN OIL & GAS REPORTER

vember 2016-March 2017 withdrawal season as a whole, the market averaged 3.0 Bcf/d shorter supply compared with the 201516 withdrawal season. That has meant withdrawals have been sufficiently strong to leave the storage inventory lower than where
it was at this time last year, despite starting this past winter at a
record high and despite the lower residential/commercial heating demand.
The Energy Information Administration's official end-of-March
storage inventory was 2.05 Tcf. That was 430 Bcf (17 percent) lower than at the end of last winter, but still 260 Bcf (11 percent) higher than the five-year average. With injection season officially under way since April 1 (even though the market saw the first-ever storage injection in the month of February this year), the question becomes what the current balance and storage level mean for storage
and prices during the April-to-October injection season. Will the yearon-year deficit in storage provide sufficient cushion, or is there still
a chance that storage can test capacity and sink prices again?
Supply/Demand Scenarios
The supply/demand balance determines the pace of injections,
so before we can consider storage scenarios, we must first look
at possible supply/demand balance scenarios. To arrive at some
plausible supply/demand scenarios for the 2017 injection season,
some assumptions are necessary about each component based on
historical data, holding a few variables constant for simplicity's
sake. For example, each of the first set of scenarios assumed that
production would stay flat to the 30-day average of 70.6 Bcf/d,
which actually would be a decline of about 0.4 Bcf/d from the
2016 injection season.
Since imports display seasonality relative to U.S. demand, the
average import volumes during the 2016 injection season were
used instead of the most recent 30 days. Canadian imports averaged 6.1 Bcf/d last year, while LNG send-out (such as pipeline
receipts of regasified LNG) averaged a paltry 0.2 Bcf/d. On the
demand side, exports are growing rapidly and are expected to continue increasing. However, for these scenarios, we assume they
remain flat to the most recent 30-day average, which comes to
4.0 Bcf/d for exports to Mexico and 1.9 Bcf/d for pipeline deliveries to Cheniere Energy's Sabine Pass LNG export facility.
That leaves U.S. consumption for power generation, industrial plants and residential/commercial usage, all of which are driven to varying degrees by the perennial wild card in any supply/demand forecast: weather. For these components combined, four demand scenarios were considered for the 2017 injection season:
* Flat compared with the 2016 injection season;
* Tracking the three-year highs for each month of injection
season, which follows 2016 numbers except for a spike that occurred in October 2015;
* Equal to the three-year average; and
* Regressing to the three-year monthly average lows for the
season, which corresponds to 2014 levels.
Figure 1 shows the year-on-year changes, or how much longer
or shorter the market will be this injection season versus 2016,
according to these assumptions and demand scenarios. If production, exports and imports all stay flat, but demand drops to the
three-year average (a full 2.4 Bcf/d below last year), market supply will be 0.5 Bcf/d longer than last year (blue bar). If demand
reverts back to three-year lows for each month, the balance will
be 3.6 Bcf/d longer than last year (gray bar). But the scenarios



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