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US natural gas hit by cold snap

Oilfield Technology,

Unprecedented cold weather conditions in the US have had a considerable impact on the natural gas market, the Bank of America Merrill Lynch reports. Significantly, a spike in heating and residential and commercial gas, as well as power demand, has depleted natural gas inventories across North America.

Figure 1. In mid-December, temperatures dropped sharply throughout the entire Lower 48 region. The figure shows the mean temperature (Celsius) anomaly, week ending 13th December 2013.

However, weather alone does not fully explain the strong storage draws. The expansion in gas-fired heating as well as coal and nuclear plant outages led to strong weather-adjusted demand. Significant production freeze-offs also tightened supplies, particularly in the Rockies.

With 45% of winter weather in terms of heating degree days still to come, weather risk remains significant, equivalent to a storage swing of 600 bcf. However, the response in prices to the extreme weather has been modest, with front-month Henry Hub failing to close above US$ 4.50/million MBtu. Even taking into account the odd local superspike, prices at the Hub have neared US$ 4.30/million MBtu during the latest polar vortex.

Figure 2. Heating degree days by region since 22nd November 2013.

Bank of America Merrill Lynch predicts US front-month natural gas prices to remain between US$ 4 and US$ 4.40/million MBtu in the winter months, assuming normal weather and end of March inventories of 1.45 tcf. The upper bound of this range is capped by the ongoing need for coal-to-gas switching and surging production growth. The report predicts 2.6 bcf/d of output growth in 2014, revised higher from 1.9 bcf/d, and forecasts end of October inventories to rise back up to normal levels of 3.8 tcf.

Thus while prices could remain above US$ 4 during the winter period, the report predicts prices will start to ease off again to below US$ 4 in the second quarter of the year.

Adapted from press release by Katie Woodward

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