Record natural gas production this year should allow prices to pull back from January's highs, according to the Energy Information Administration (EIA), but the agency still expects Henry Hub prices to average $3.20/MMBtu in 2018, well above its previous projection.
"Cold weather east of the Rocky Mountains last month pushed natural gas inventory withdrawals to a record high and contributed to sharp increases in natural gas spot prices, which rose more than one dollar from December's price to $3.88/MMBtu in January," said EIA Administrator Linda Capuano.
Henry Hub prices are expected to average $3.44/MMBtu this month, EIA said in its latest Short-Term Energy Outlook (STEO), which was released Tuesday.
The latest 2018 price forecast is up 32 cents/MMBtu from the $2.88/MMBtu forecast in EIA's January STEO. EIA forecast prices next year will average $3.08/MMBtu.
New York Mercantile Exchange contract values for May 2018 delivery traded during the five-day period ending Feb. 1 suggest a price range of $2.26-3.67/MMBtu, encompassing the market expectation of Henry Hub prices in May at the 95% confidence level, EIA said.
The natural gas futures contract for February delivery at Henry Hub expired on Jan. 29 at $3.63/MMBtu, an increase of 58 cents/MMBtu from Jan. 2. The contract for March delivery became the front-month contract on Jan. 30 and settled at $2.86/MMBtu on Feb. 1. "Moderating weather forecasts for February contributed to a decline in the March contract prices," EIA said.
Dry natural gas production last year was an estimated 73.6 Bcf/d, up 1.0% compared with the 2016 total. EIA expects 2018 production will reach 80.3 Bcf/d, which would be 6.7 Bcf/d higher than the 2017 level and would establish both a new record high and the highest annual growth on record. Natural gas production is also expected to increase again in 2019, growing 2.6 Bcf/d.
In early January, a massive winter storm spawned by curiously named weather phenomena -- bombogenesis, aka abomb cyclone -- knocked power out to thousands of customers along the East Coast and set a series of cold weather records.
"Cold weather appears to have driven estimated U.S. natural gas demand to a record high of 150.7 Bcf on Jan. 1, surpassing the previous single-day record set in 2014," EIA said. "Heating degree days were 32% above normal for the week ending Jan. 4. Because of cold weather east of the Rockies, inventories fell relative to the five-year average in all regions except the Pacific region during the first four weeks of January.
"January saw the two largest withdrawals on record: 359 Bcf for the week ending Jan. 5 and 288 Bcf for the week ending Jan. 19. The cold weather had a significant effect on the South Central region, where the Henry Hub national benchmark is located. Withdrawals in that region comprised between 42% and 43% of total U.S. withdrawals in both of the record-breaking weeks because of increased natural gas-fired electricity generation for heating."
Those large inventory draws put upward pressure mainly on the near months of the futures curve, EIA said.
"The difference between the prices of the front-month natural gas contract and the contract for delivery 13 months in the future (1st-13th spread) increased from -33 cents/MMBtu on Dec. 26, 2017, to 38 cents/MMBtu on Jan. 24, 2018. The change in the 1st–13th spread implies a reversal of the expectations of market conditions.
"Through December, the negative 1st–13th spread indicated a market that was anticipating supply to outpace demand. Money managers increased their short (sell) positions in natural gas futures contracts by 150,356 contracts from Nov. 14 to Dec. 26, possibly anticipating a decline in natural gas prices as natural gas production continued to reach record levels. In early January, the record-setting natural gas demand and inventory draws indicated a substantial tightening of the market and pushed up near-term prices."