High seasonal demand for natural gas in the US this winter has driven a significant draw-down in inventories and pushed Henry Hub natural gas prices well above $5.00 per million cubic feet (mcf), a level not seen on a sustained basis since 2010. However, Fitch Ratings believes a much-improved, long-term US gas supply outlook will contain price pressures once seasonal demand patterns normalize.
We do not expect significant price pressure to continue beyond the winter, despite currently low inventory levels and NOAA forecasts for more cold weather across much of the eastern US into February. On Jan. 24, natural gas storage stood at just 2,193 billion cubic feet (bcf), a level that was 22.5% below last year’s storage levels and 16.6% below the five-year average, according to Energy Information Agency data.
The fact that rising spot gas prices have not been accompanied by big moves in longer-dated forward prices for natural gas indicates that the current price rises are temporary and normal seasonal corrections appear likely this spring. While spot prices have moved up sharply due to weather impacts, far-dated futures have shown much less volatility. At the end of January, gas for delivery in 2015 was just $4.17/mcf, while gas for delivery in 2016 was just $4.14/mcf. By contrast, gas averaged more than $5.50/mcf over the last decade and averaged $8.80/mcf in 2008.
The limited price volatility seen in the long-dated futures markets reflects the ongoing impact of the shale revolution, which promises to continue to supply abundant natural gas production at low costs, even in the face of an expected surge in demand from chemicals, utilities and other manufacturers.
Fitch’s price deck for natural gas prices assumes a long-term price of $4.50/mcf. We do not believe that any fundamental changes in our price deck will be required unless another sharp increase in industrial and power demand occurs. A demand shift of this kind would likely require more major upgrades in LNG export capacity, additional switching from coal to gas by electric utilities and/or incrementally more new greenfield investment by chemical companies above what is currently planned.
