Natural gas prices had risen 42% since early November 2016
US natural gas prices during the week ended Wednesday, January 11th, 2017, decreased after the week began with extremely cold polar vortex weather, and temperatures moderated through the week. Henry Hub spot price fell from $3.37/MMBtu to $3.28/MMBtu on January 11th, 2017. US natural gas prices plunged amid forecasts that temperatures will be average or higher across most population centers by the middle of January 2017.
Earlier forecasts had predicted colder temperatures would persist through most of January 2017, boosting heating demand. However, the fall in gas prices comes after hedge funds had amassed unusually large bullish bets, helping drive prices up by more than 40% in the last two months. Once the speculative build-up of hedge fund positions are reversed, prices are likely to continue trending upwards in 2017, according to Reuters’ estimates.
By the end of 2016, hedge funds had amassed the largest net long position in natural gas futures and options for more than two years. Hedge funds held a net long position equivalent to 2,927 billion cubic feet of gas on December 27th, 2016, according to data published by the US Commodity Futures Trading Commission. Fund managers’ net position had increased by the equivalent of 1,641 billion cubic feet or 128% in just six weeks. The concentration of positions left the market vulnerable to a correction once prices stopped rising and funds attempted to take some of their profits.
Futures prices for gas delivered to Henry Hub in February fell by almost 40 cents per million British thermal units, or nearly 11%, on January 03rd, 2017, mainly due to revised weather forecasts showing temperatures across most of the US would be higher by mid-January 2017. It now appears likely that the worst of the cold will occur over Europe, while temperatures will be normal or above normal over most of North America.
US gas stocks decline the most since 2013
US working gas stocks in underground storage declined by 687 billion cubic feet during the final six weeks of 2016, which is the largest seasonal decline since 2013. By December 23rd, 2016, stocks were 413 billion cubic feet, or 11% below the level at the same point in 2015, according to the US Energy Information Administration. Stocks were also 79 billion cubic feet, or 2% below the 2011-2015 average, the first time in 2016 stocks had fallen below the five-year average. The enormous glut of gas left at the end of the winter of 2015/16 has been erased by the very low prices which prevailed through most of 2016.
Moreover, the number of rigs drilling for gas in the US fell to its lowest level for more than a quarter of a century in August 2016 as producers scaled back work on new wells. Meanwhile, the combination of above average temperatures from the end of May 2016 through September 2016 and low gas prices encouraged record gas combustion by electricity producers. Gas stocks fell by an extra 144 billion cubic feet in the first three weeks of December 2016 after adjusting for moderating temperatures.
On the supply side, the average total supply of natural gas averaged 77.3 Bcf/d during the week ended January 11th, 2017, according to data from PointLogic. Dry natural gas production decreased by 2% compared with the previous week, while average net imports from Canada increased by 14% from the previous week.
Outlook for 2017
During 2017, gas drilling is expected to pick up in response to rising prices. The number of rigs drilling for natural gas is up from a low of 81 in August 2016 to 132 at the end of 2016, according to Baker Hughes. An increase in oil-well drilling since May 2016 will also increase gas supplies through the production of more associated or casing head gas.
Meanwhile, gas consumption is also set to rise 2017 as another 11.5 gigawatts of gas-fired power generating capacity is to be installed by the end of 2017. This is because combined-cycle gas turbines (CCGTs) are displacing smaller, older, less-efficient and less-flexible coal-fired power plants across the world. Hence, gas prices would be higher on average during 2017 to sustain increased drilling and curb gas consumption by reducing the number of hours run by CCGTs.