Monday, March 7, 2016

Active rigs:

	3/7/2016	03/07/2015	03/07/2014	03/07/2013	03/07/2012
Active Rigs	35	114	191	186	204

RBN Energy: natural gas storage limite -- summer battle ahead to keep the lid on inventories.

On Friday (March 4, 2016) the April NYMEX/CME futures contract settled at $1.666/MMBtu, the lowest contract settlement since 1999. Rock bottom prices reflect a growing supply/demand imbalance and concerns about hitting storage capacity limits later this year.

Last Thursday’s EIA report showed U.S. gas inventory stands 827 Bcf above last year at this time and 687 Bcf above the 5-year average.

These are the biggest surpluses the market has seen since 2012.

Moreover, our latest NATGAS Billboard storage outlook shows March withdrawals lagging way behind last year and expanding the surplus further heading into April. In today’s blog, we look at how a similar situation was resolved in 2012 and what it will take to bring down the surplus this year.

First we take a look at where we are now in early March – the last month of the winter withdrawal season. The latest Billboard storage estimates (RBN’s new natural gas market report developed with Criterion Research, as of March 4, 2016) indicate the market will withdraw a net 70 Bcf between now and March 25, including the likelihood of two weekly injections (yes – we mean injections) in mid-March. That’s compared to last year’s 248-Bcf draw in the same period and a 5-year average draw of 245-Bcf. Injections are not uncommon in March as the weather begins to transition from winter to spring and overall temperatures rise. However, considering that storage inventories started this March much higher than last year or the 5-year average, early injections this year will only exacerbate the current oversupply conditions. Based on these storage estimates, our Billboard analyses projects that natural gas in storage will end the withdrawal season (Nov-March) slightly above 2,400 Bcf, about 900 Bcf higher than 2015 and about 800 Bcf above the 5-year average, which is an enormous surplus in storage heading into the summer injection season (April-Oct).

This surplus is the key feature of the market this year. It not only reflects the current imbalance between supply and demand but also indicates how big a correction is needed to bring the market back into balance. There are very specific implications for the gas market in 2016 because the surplus cannot grow indefinitely as storage capacity is finite. Limited storage capacity not only puts a ceiling on inventory levels but also puts a time constraint on drawing down the mountain of gas already in storage. Last year, inventories peaked at their all-time high of 4,009 Bcf in November. If the market were to end March with a 900-Bcf surplus versus last year, as Billboard projects, and carry that surplus through to November 2016, inventories would peak at 4,909 Bcf. But as we pointed out in Hot Stuff, this is not physically possible, given that U.S. storage capacity is only believed to be 4,300 Bcf. So the outstanding market question is how exactly will storage balance this year and what will it take? Basically the solution has to come either from lower supply (meaning less production) or higher demand.