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Natural Gas Prices Continue To Rise

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Just a few quick hitting points for the U.S. natural gas market...

Gas Prices

Close yesterday, January contract was up $1.01 in 19 trading days. Gas for January delivery settled up 21.8 cents, or 6.3% from Friday, at $3.654 per million Btu. Since November 11, gas has surged nearly 40%, sending gas to its highest prices since December 2014. Once January overcomes $3.68 the next most likely stalling point is $3.90.

EIA last week reported gas stocks decreased by 50 Bcf for the week ending November 25, right on target with the analyst expectation of a storage decline of about 52 Bcf. We are still at about 4 Tcf of storage, which for reference is about 15% of total U.S. demand. This is 24 Bcf above where we were last year at this time and 6-7% above the 5 year average. Thus, the fundamentals are still weak and the current run-up feels hollow.

After a historically warm summer and fall, forecasts show below-average temperatures spreading across most of the country, especially 8-14 day seeing colder temperatures in the Midwest and Great Lakes regions, pushing prices higher. The market has been looking for good news, and expected colder weather is bringing it. Classic overreaction?

Gas Production

Rising prices have increased oil rigs for five straight counts – to the highest levels in 10 months. You should know that the price of oil is key for gas production because more oil rigs mean more associated gas, which accounts for about 20% of U.S. gas production. I have seen projections of associated gas being strong enough to push prices back to the $2.50 mark within a few months time. If higher oil prices can sustain themselves, say at a level of $57-60 and above, IEA has said that U.S. shale oil could “pour” onto the market, just as OPEC and Russia make their cuts.

EIA, meanwhile, already had U.S. gas production increasing each quarter in 2017, namely based on more takeaway capacity in the Northeast that will bring more markets for drillers. Just take the Utica, four new projects (Rover, NEXUS, Leach Xpress, Rayne Xpress, all due to be completed by end of 2018 or before) will add an additional 6.8 Bcf/d of takeaway capacity out of the play. Despite the protests we keep hearing about, even the most isolated gas market seems to be getting relief: “New England natural gas pipeline capacity increases for the first time since 2010.”

Gas Demand

Adding to the lack of fundamentals, U.S. gas power burn for December is actually expected to be 22.3 Bcf/d, 2.6 Bcf/d lower than December 2015, with the Northeast the only region climbing higher. This is particularly bearish because electricity accounts for 33% of all gas use. Coal to gas switching in the power sector has been trending lower, and the election of Donald Trump has given optimism to coal country.

Rising coal prices are helping companies, and both coal production and generation are expected to increase next year - but, if prices increase too much, coal to gas switching will resume. President-elect Trump's plans for massive infrastructure investment is bullish for met coal demand because it's a critical ingredient in steel making.

Higher oil prices could cause more oil to gas switching in the industrial sector in particular, a trend that has been unexpectedly lower because of sunken oil prices. Overall, know that gas demand is becoming less weather sensitive as manufacturing shifts more to the Gulf Coast region (away from the colder Midwest), where some $150 billion in projects are underway.

U.S. gas exports to Mexico are up over 4 Bcf/day, which wasn’t supposed to happen until 2018. U.S. pipeline capacity to Mexico is now expected to double to 15 Bcf/d by 2018. As for LNG, Sabine Pass had 10-11 cargoes leaving in November, beating its previous high in August. With over 45 cargoes leaving since exports started in February, now rising LNG prices in Asia thanks to cold weather has Cheniere expecting to export some of its own gas supply in the coming months.