American Oil and Gas Reporter - December 2015 - 36

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SpecialReport: Natural Gas White Papers

Near term, in the wake of steep price declines in November,
the prospects for rebounding U.S. natural gas prices are better,
but not dramatically so. As is always the case for the gas market, weather plays an important role.
EIA estimates Henry Hub prices will average $3.00 an
MMBtu in 2016. However, that outlook generally is premised on
normal weather, and temperatures in the first month of the winter heating season were far from normal. November's warm weather pushed the amount of gas in U.S. storage facilities to above
4.0 trillion cubic feet for the first time, with the U.S. supply surplus exacerbated by near-record Canadian storage levels.
Furthermore, nearly every weather service provider is predicting very mild weather during the heart of the heating season. For
example, Weather Decision Technologies Inc. forecasts a 70 percent likelihood of warmer-than-normal weather in January in areas that ordinarily account for the most space heating demand,
followed by a 60 percent chance in February (Figure1).
The potential for an unusually warm winter, coupled with increased U.S. production in the final two months of 2015, were
the primary factors triggering the November price nose dive, which

in turn, knocked January and February futures contracts into the
$2.30/MMBtu range prior to Thanksgiving.
Winter space heating demand is the most important gas price
factor during each storage cycle, with potential consumption
swings of 1.0 trillion cubic feet or more, depending on winter
weather. If forecasts prove accurate, there is little chance of a return to EIA's predicted $3.00/MMBtu price in 2016.
However, the November sell-off (which drove December 2015October 2016 NYMEX futures contracts to about $2.40/MMBtu), most likely went too far. Deeply depressed cash market prices
prompted high levels of coal displacement, pushing natural gas
consumption in the electric generation sector to record levels this
fall. Continued low prices could boost power sector gas demand
by more than 600 Bcf compared with last winter, offsetting much
of the impact of warm temperatures.
Therefore, despite record storage and increasing end-of-year
U.S. production, storage withdrawals likely will be stronger than
many market analysts predict at current cash market prices, helping reduce the storage overhang by winter's end.
Moreover, core (not weather-related) demand is expected to
expand as a result of increasing Mexican exports, additional coal
and nuclear plant retirements, major Gulf Coast industrial projects starting, and U.S. LNG exports commencing with the first
two trains at the Sabine Pass terminal. If low oil prices persist,
production of associated gas also could start to decline.
Consequently, the U.S. gas market should begin to gradually tighten during the 2016 injection season. Even with very mild
weather this winter, natural gas prices are likely to rebound by

FIGURE 2A
February 2016 Weather Forecast

FIGURE 2B
February 2016 Alternate Forecast (40% Odds)

is paramount. The International Energy Agency reports global
oil consumption grew at the rate of 1.8 MMbbl/d in 2015-the
strongest increase in five years. IEA projects an additional 1.2
MMbbl/d in demand growth for 2016, but it will take time to work
off the surplus of crude oil and finished products in storage to
allow global supply/demand to reach equilibrium and provide the
impetus for a significant price rebound.
Natural Gas Outlook

Sources: Weather Decision Technologies, EBW Analytics

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American Oil and Gas Reporter - December 2015

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