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Short-Term Energy Outlook

Release Date: February 6, 2018  |  Next Release Date: March 6, 2018  |  Full Report    |   Text Only   |   All Tables   |   All Figures

Natural Gas

The natural gas futures contract for February delivery at Henry Hub expired on January 29 at $3.63/million British thermal units (MMBtu), an increase of 58 cents/MMBtu from January 2 (Figure 9). Cold weather east of the Rockies, record-level withdrawals from storage, and record demand contributed to substantial increases in prices in January. These demand factors likely outweighed EIA estimates of U.S. dry natural gas production reaching 77.6 billion cubic feet per day (Bcf/d) in January, a year-over-year increase of 7.0 Bcf/d. The contract for March delivery became the front-month contract on January 30 and settled at $2.86/MMBtu on February 1. Moderating weather forecasts for February contributed to a decline in the March contract prices. The Henry Hub natural gas spot price averaged $3.88/MMBtu in January, $1.06/MMBtu higher than the average December price.

Cold weather appears to have driven estimated U.S. natural gas demand to a record high of 150.7 billion cubic feet on January 1, surpassing the previous single-day record set in 2014. Heating degree days (HDD) were 32% above normal for the week ending January 4. Because of cold weather east of the Rockies, inventories fell relative to the five-year average in all regions except the Pacific region during the first four weeks of January. January saw the two largest withdrawals on record: 359 Bcf for the week ending January 5 and 288 Bcf for the week ending January 19. The cold weather had a significant effect on the South Central region, where the Henry Hub national benchmark is located. Withdrawals in that region comprised between 42% and 43% of total U.S. withdrawals in both of the record-breaking weeks because of increased natural gas-fired electricity generation for heating.

Figure 9: Natural gas front-month futures prices and actual minus historical average HDD and CDD

The cold weather and high demand affected natural gas spot prices more than futures prices. Henry Hub spot prices more than doubled from $2.76/MMBtu on December 27, 2017, to $6.24/MMBtu on January 3, 2018, the highest price since the polar vortex in early 2014 when cold weather led to similar price increases (Figure 10). Since 2014, the U.S. demand profile has changed with the addition of liquefied natural gas (LNG) export facilities and increased pipeline exports. Total exports in January 2018 are estimated to account for 9% of combined consumption and exports compared with 4% in January 2014. However, rising production contributes to EIA’s forecast that inventories will end the withdrawal season (end of March) at 1,429 Bcf, 17% below the five-year average. In 2014, inventories were 55% below the 2009–13 average at the end of withdrawal season.

Figure 10: Henry Hub natural gas spot prices

The large inventory draws in January put upward pressure mainly on the near months of the natural gas futures curve. The difference between the prices of the front-month natural gas contract and the contract for delivery 13 months in the future (1st–13th spread) increased from -33 cents/MMBtu on December 26, 2017, to 38 cents/MMBtu on January 24, 2018 (Figure 11). The change in the 1st–13th spread implies a reversal of the expectations of market conditions. Through December, the negative 1st–13th spread indicated a market that was anticipating supply to outpace demand. Money managers increased their short (sell) positions in natural gas futures contracts by 150,356 contracts from November 14 to December 26, possibly anticipating a decline in natural gas prices as natural gas production continued to reach record levels. In early January, the record-setting natural gas demand and inventory draws indicated a substantial tightening of the market and pushed up near-term prices. The reduction in money manager short positions by 170,253 contracts from December 26, 2017, to January 23, 2018, likely provided some additional buying pressure on the February natural gas contract. The 1st–13th price spread declined when the comparisons shifted to the March contract, falling to -15 cents/MMBtu on February 1.

Figure 11: Natural gas 1st-13th futures price spread

U.S. Natural Gas Summary
Prices (dollars per thousand cubic feet)
Henry Hub Spot 2.613.103.313.19
Residential Sector 10.0410.9710.7810.96
Commercial Sector 7.297.908.048.08
Industrial Sector 3.524.154.394.31
Supply (billion cubic feet per day)
Marketed Production 77.8178.9186.4289.38
Dry Gas Production 72.8573.5780.3082.86
Pipeline Imports 7.978.087.898.21
LNG Imports
Consumption (billion cubic feet per day)
Residential Sector 11.8712.1212.8812.67
Commercial Sector 8.488.639.099.04
Industrial Sector 21.1021.5421.7522.25
Electric Power Sector 27.2825.6026.7927.91
Total Consumption 75.1074.2977.4479.20
Primary Assumptions (percent change from previous year)
Heating Degree Days -5.1-1.511.0-0.6
Cooling Degree Days 4.7-8.7-4.20.3
Commercial Employment
Natural-gas-weighted Industrial Production