This year has been relatively bullish for the US natural gas market, largely because of an extremely cold winter season in much of the nation and the drawdown of storage inventories to record-low levels. Only recently, thanks to a mild summer and strong domestic production, gas inventories have climbed from an 11-year low in March to 2.71 tcf on Aug. 29.
Some long-term, structural increments in US gas demand are expected to kick off in 2015, including higher exports to Mexico and the shift to gas from coal to feed electric power plants. However, assuming normal winter weather, gas will remain a challenged commodity in 2015 in the US, according to a recent outlook from Houston-based energy investment firm Simmons & Co. International.
"We believe the 2015 US natural gas supply-demand outlook will be challenging-perhaps the toughest year for the gas market since 2012 (the year there was no winter)," said Bill Herbert, co-head of research at Simmons & Co.
Besides the drop in residential consumption, the primary culprits for the weakness are surging gas production driven by the Marcellus and Utica shale play areas, associated gas growth driven by robust oil production, and a flattening of declines in legacy gas regions. According to BP PLC's Statistical Review of World Energy 2014, the US has achieved world-leading gas production. The US Energy Information Administration expects 2015 US gas marketed production to rise 2.1%, following a 5.3% increase in 2014.
Using Simmons & Co.'s own base assumption of total supply of 74.2 bcfd and total demand of 72.7 bcfd for 2015, gas in storage on Nov. 1, 2015, would reach 4.1-4.2 tcf, overtaking the previous record (3.9 tcf) in storage set in November 2012. However, Herbert and his team do not expect gas in storage to reach this level and believe the market should send the necessary price signal, $3.50/MMbtu or lower, to dispatch further demand, most likely electric power generation, or decrease supply to keep Nov. 1, 2015, storage levels at the prior record level.
Looking even farther ahead
The long-term demand growth for gas in the US will be driven primarily by LNG exports, gas exports to Mexico and Canada, electric power generation, industry, and transportation. Currently, a few plans are under way to build liquefaction capacity to export LNG from the US. Cheniere Energy's Sabine Pass facility is expected to be the first to liquefy gas produced in the Lower 48 for export. It is slated to come online in stages beginning in late 2015, EIA said.
As 2015 is just a "kick off" of the long-term story, 2016-20 are the more meaningful years for the US gas industry with these effects to be fully unfolded, as stated in Simmons & Co.'s outlook.
Despite this rising wave of demand, the gas market's landscape will ultimately be codetermined by the supply side, including oil production growth in the US and the resulting associated gas, as well as infrastructure and production growth in the prolific Utica and Marcellus basins.
For producers, cost consideration and price incentive are two key elements of their investment decisions. With each passing year and the accumulated experiences, the exploration and production industry should result in a reduction of the production cost curve. Long-term price expectations, as signaled by calendar strips on the New York Mercantile Exchange between 2016 ($4.08/MMbtu) and 2020 ($4.56/MMbtu), are also supportive.
"Overall, we believe that the current forward strip has some upside pricing potential starting most likely in 2016, in order to generate the supply to meet this demand wave," Herbert said. However, he believes that gas prices will have difficulty averaging above $5/MMbtu for extended periods of time because many unconstrained gas regions are highly economic at that price. Or, in other words, that price is too high as an equilibrium price to clear the market.
