Natural gas prices may have faltered in the first trading day of the year, but some analysts are still bullish on the outlook for 2017.
With demand for the power-plant fuel surpassing coal for the first time in the U.S. and exports soaring, a years-long glut from shale formations has finally been erased. Now, all natural gas needs is a good, cold winter.
Traders are watching closely to see how the commodity, which recorded its biggest rally in 11 years after stockpiles fell below their five-year average, holds up against a warm weather forecast running through Jan. 17, typically the coldest time of year. Tim Evans, an analyst at Citi Futures Perspective in New York, said he believes the stockpile deficit could even grow as winter plays out through the end of January and into February.
“Demand is up and supply is down,” Evans said in a telephone interview. “It pays to watch the details of what we’ve got going on the supply side, on the export levels to Mexico and the exports of LNG.”
Gas futures on Tuesday plunged by the most in almost three years after forecasts released earlier for a deep freeze across the U.S. suddenly turned milder. Prior to that point, gas prices were expected to average $3.18 per million British thermal units, a 25 percent increase over 2016, based on median of 22 analyst estimates compiled by Bloomberg. Gas futures traded little changed at $3.330 per million British thermal units on the New York Mercantile Exchange at 12:53 p.m. in Hong Kong.
Still, Evans remains unfazed. “If we do get another cycle of cold this winter, say later in January or into February, then natural gas prices are going to go back on the upswing in a volatile fashion. This is what natural gas trading entails: we rally for three weeks and drop like a rock.”
While warmer winter temperatures will continue to be a major risk to a 2017 gas rally, shale supply also is a concern. Production dropped last year as drillers cut costs after prices tumbled to historic lows in March, but output has started to recover. The number of rigs drilling for gas in the U.S. has jumped more than 60 percent after sliding in August to the lowest in data going back to 1987, data from Baker Hughes Inc. show.
Still, the stockpile deficit won’t disappear anytime soon, according to Bank of America Corp.
“The U.S. natural balance is tightening rapidly on falling production and strong structural demand growth, especially from LNG export facilities,” Bank of America analysts led by Francisco Blanch in New York said in a note to clients Dec. 8. “Stocks will likely normalize by the end of this winter and then move to a large deficit by end of October, which may last well into 2018.”