After months of being stuck in the $2.75 to $3.10 range, natural gas prices have finally started to rise, with the December contract hitting $3.21 per MMBtu on November 10. Although November gas contract expired at $2.75 at the end of October, easily the lowest expiration since March ($2.63), prices closed on Friday at $3.10. The gas-based heating season is in full swing, and residential usage surges to being over 30% in winter for all gas demand, versus around 5% in summer. Gas demand in winter can double from summer to up over 140 Bcf/d. Prices for January, at the peak winter heating season, are now 25 cents higher than for May.
After one of the warmest Octobers we have had in the past 15 years, sentiment for gas prices had become too gloomy. Gas storage is now about 7% below last year and 3% below the five-year average, when we had a 12-14% surplus over the five-year average back before summer. And don't forget that despite a record of over 4,000 Bcf in storage before the November withdrawal season started, prompt month still almost reached $4 at the end of last December. Raw numbers wise, stocks have swung from a surplus of nearly 400 Bcf over the five-year average at the start of March to a deficit of 101 Bcf on November 10. We had our first gas withdrawal of 18 Bcf reported last week, with forecasts of 50-60 Bcf withdrawals over each of the next two weeks. And overall winter withdrawals could total 2,300 Bcf, leaving 1,500 Bcf going into the injection season starting in April 2018 - about a quarter less than where we were this past April.
After two historically warm winters (see my article here), an expected colder winter coming could push traders into panic mode, especially with storage being lower than what we have seen in recent years. Hedge funds, however, haven't been real optimistic. At the end of October, portfolio managers held about 1.6 long positions for every 1 short, way down from nearly a 3 to 1 ratio back in the middle of September. Let me be clear: my research of over 12 years tells me that trading activity accounts for 20-30% of gas prices. Ultimately, it's really unknowable how these market players will act. The buying of commodities because bulls think prices will rise can artificially push prices up, and vice versa. Gas is much harder to tell because it's still mostly sold in regional markets, but just take the global commodity of oil, where over a billion barrels of paper trades are made a day, or a ridiculous 10-fold more than the entire global oil market of 97 million barrels consumed per day.
But, it's good to see that fundamentals still do matter. For example, from November 2 to November 10, U.S. gas demand surged from about 33% to nearly 100 Bcf/d, and prices jumped 27 cents, or over 9%. Demand levels throughout the first 18 days of November have averaged ~85 Bcf/d, compared to ~73 Bcf/d in November 2016. Indeed, the gas market is almost certainly tighter than it appears because underlying baseload demand is higher, namely 4.4 Bcf/d in exports to Mexico and over 3 Bcf/d in LNG feedgas demand. It is interesting, however, that exports to Mexico are high but have underachieved a bit, being stuck in the 4 to 4.5 Bcf/d range for almost all of the year. Go back to early-summer and the projections were that Mexico would now be importing 5 to 5.5 Bcf/d.
Perhaps the most noteworthy part about the run-up in gas prices is that U.S. gas production has been surging to all-time highs, now at over 76 Bcf/d. The spring and early-summer projections of a 4th quarter production boom have been proven correct. Gas production had been mundanely stuck in the 70-71 Bcf/d range for the first half of the year. Moreover, rising oil prices (see my article here) will continue to help associated gas production, especially important in Texas. Indeed, higher prices for both oil and gas encourage production: the U.S. gas directed rig count was up 8 rigs last week to 177, although still down from the yearly high of 192 on July 28. Appalachia (now categorized as the Marcellus and Utica plays together) will surpass 26 Bcf/d for the first time ever in December here, and no doubt we hit over 80 Bcf/d in U.S. gas production at some point in 2018 as the midstream buildout continues.
