Natural gas (NYSEARCA:UNG) storage saw an implied inflow of +73 bcf last week.
Working gas in storage is at a record 2,557 bcf. Stocks were 870 Bcf higher than last year at this time and 832 Bcf above the five-year average of 1,725 Bcf.
Last week's inventory build was expected as this time of the year is when storage is expected to build, thanks to a transition in the weather from winter to spring. Gas storage seasonally builds into October-November in preparation for winter. If summer is expected to be hotter than normal, then gas storage will build lower than expected, and could be right in line with the five-year average. A colder-than-expected winter could then potentially draw down inventory much faster than people expect, resulting in higher natural gas prices.
Let's Look at Supply First
Total supply dropped 1% relative to last year and 0.6% week over week. At current rig counts, it's hard to imagine what would happen to the natural gas supply once all the drilled but uncompleted (DUCs) wells are used.
Despite a record low number of rigs, dry gas production has been held up due to increased efficiency and DUCs. We estimate that the decline in production this year will be quite substantial. We estimate the current decrease in supply of 5 bcf/d to 8 bcf/d. Just from the supply decrease alone, the natural gas market should go into balance assuming "normal weather" conditions.
Now Let's Look at Demand
Exports to Mexico remain on pace, as shown below:
As summer heating demand increases, exports to Mexico will increase over 4 bcf/d. LNG demand remains on track to hit 1.2 bcf/d. Lastly, the summer weather forecast is expected to be much warmer than normal.
These short-term demand tailwinds will result in lower-than-normal injection during the build season.
Working gas in storage continues to keep a lid on natural gas prices. We think near-term prices are accurate to reflect the storage figures, but the long end of the curve does not reflect a reasonable price for sustained production. Our expectation is for 2017 STRIP to average $3.50/mcf.
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