The rally in natural gas prices on sluggish storage injections and winter cold signal a fundamental shift in the US gas market: traders, for the first time in years, are betting against US supply growth.
Year-over-year increases in US output have been a hallmark of the US market for more than a decade. The steady increase in supply — created first by a boom in shale-gas production and prolonged by the surge in associated output from oil fields — led to gas prices collapsing earlier this year to 17-year lows below $1.65/mmBtu.
Those low prices have called into question whether the so-called shale boom will be able to compete next year with rising exports and growing power sector gas demand. Persistently low prices allowed gas demand to flourish in 2016. Gas is on pace this year to top coal as the top US source of fuel for power generation. Natural gas generation has surpassed coal-fired generation in the first nine months of this year and is running 7.5pc ahead of 2015 levels, according to the most recent US government data.
In addition, gas exports through pipelines to Mexico and to overseas markets on LNG vessels have shot higher. Gas exports should receive another boost early next year as new pipeline projects and a third train at Cheniere Energy's Sabine Pass export terminal in Louisiana start service.
Gas intake this month at the Sabine Pass LNG export terminal has averaged about 1.4 Bcf/d (40mn m³/d) in recent weeks. The terminal started sending gas to overseas markets in February 2015. Exports from that terminal could increase by 50pc, once the third train begins service, likely in February.
That demand growth is occurring against a backdrop of falling supply. The US Energy Information Administration, the statistical arm of the US Department of Energy, said this month that marketed production in 2016 should decline to 77.5 Bcf/d, down by 1.7pc, or 1.3 Bcf/d from the all-time high hit in 2015. That would mark the first year-over-year drop in more than a decade.
US production is still high by historical standards but the prospect of even a modest decline has raised questions about whether a normal winter would quickly deplete the record-high amounts of gas in storage. US government forecasters are predicting that winter 2016-17 will be 3pc warmer than normal but significantly colder than the mild 2015-16 winter. Private forecasters see a colder-than-normal heating season thanks to a weak La Nina, a weather event associated with a cooling of waters in the Pacific.
Predictions for colder-than-normal weather during the first few weeks of December lifted Nymex prompt-month gas prices on 9 December to $3.746/mmBtu, the highest in about two years. The run-up in gas prices has encouraged gas producers to return rigs to places like the Marcellus shale and the Permian basin, the two top gas-producing formations in the US by volume.
The increase in drilling and thousands of drilled but uncompleted wells could buoy US output by the end of 2016. But some analysts do not expect year-over-year production growth to resume until the second half of 2017.
