Fitch: Strong supply drives U.S. gas prices down

Downward graph
Source: DollarPhotoClub

U.S. natural gas inventories continue to recover from the large inventory depletions seen this past winter and supports lower pricing, according to Fitch Ratings. Strong supply growth has been driven by an abundance in low cost shale gas.

Following a polar vortex driven winter in the U.S., total gas inventories dipped to less than 850 billion cubic feet (Bcf) at the end of March, far below their five-year average of approximately 2.05 trillion cubic feet (Tcf). But strong supply growth since that time has allowed for rapid rebuilding of inventory.

Since May, gas storage injections have averaged over 100 Bcf per week, according to U.S. Energy Information Administration EIA statistics. That is well above the 73 Bcf per week seen on average over the previous five years. This ramp-up has taken place despite slightly above-average cooling degree days for the January-June period, which serve as a proxy for airconditioning demand. According to the most recent EIA natural gas storage data, total gas inventories as of Aug. 1 rose to 2.39 Tcf – about 20% below historical averages, but a sizeable improvement in the inventory deficit at the end of winter.

Spot and forward prices reflect the fast rise in supplies. Recent spot natural gas prices have fallen to approximately $3.80/million cubic feet (mcf) compared to levels as high as $6+/mcf this past winter. The longer end of the forward curve continues to reflect expectations of ample supply from low cost shale plays, with 2018 Henry Hub natural gas priced at approximately $4.40/mcf. This is consistent with Fitch’s long-term natural gas price deck of $4.50/mcf as contained in our energy outlook.

Fitch expects natural gas prices to remain subdued over the next several years. We believe several factors will drive this trend in North America including large amounts of associated (by-product) gas coming from liquids shale plays, continued improvements in well designs, completion technology, and the fact that many onshore producers can earn a full return on their cost of capital at historically lower prices, all of which should help lower the marginal cost of supply.

For additional information, please see our report titled, “2014 Outlook: Natural Gas Pipelines, Shifting Flows.”

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