It’s increasingly clear that the natural gas market is caught between risk of a cold winter in the short term, and a growing imbalance between structural growth of natural gas supply and demand. The low inventory condition that has captivated the attention of the natural gas market for the past ten months is giving way to a realization that underlying market fundamentals are highly encouraging for end-users of natural gas. While moderate summer weather has contributed to the record refill of storage inventories, production growth has been a key driver. To put the supply situation in perspective, the winter strip settled near $3.85 last year with inventory levels more than 250 Bcf higher than at the end of October. Despite that inventory shortfall, the winter strip is priced at a discount to the 2013 level for the end of October. Supply is up more than 4 Bcf per day versus the same month in 2013 in each of the last two months and the high drilling rig count and planned pipeline capacity additions in the next year indicate that 2015 is in line to see similar growth to this year. At the same time demand is not keeping pace with the rampant growth of natural gas supply. Industrial demand has grown by roughly 0.5 Bcf per day in each of the past two years and power generation growth was nonexistent this year, owing partially to mild weather and partially to summer prices that averaged $4.31 per MMBtu. 

Last winter provided a convenient hole in storage inventories to paper over the imbalance between supply and demand. Looking forward, even another cold winter may not be enough to alleviate what is shaping up as an over-supplied market. The table below lays out a fairly conservative projection of the market balance one year out. Power generation and industrial demand projections are strong compared to recent historical rates of growth. The residential and commercial demand segment posits an increase over 2014’s cold weather-driven historical highs. Even with those strong assumptions built in to the model, at a middle of the road assumption regarding supply growth, inventory levels still reach maximum capacity levels by October of next year.  While the numbers going into the model can (and will) be fine-tuned the macro message is clear that 2015 faces a strong risk of oversupply. In that environment, prices will have to fall to levels that create an incentive for power generation demand to increase at the expense of coal-fired generation.

Natural Gas Prices ($/MMBtu)
LOCATION	July 31, 2014	October 31, 2014

October 31, 2013

NYMEX

3.58

3.87

3.84

NNG Ventura

3.71

4.07

3.69

Calif. Citygate

4.45

4.02

3.88