Fitch: Gas supply near 5-year avg., but less shale drilling a concern

Fitch Ratings

Natural gas storage has largely recovered from the inventory depletions that followed last year's polar vortex winter despite the recent burst of cold weather in the US and related drawdown in gas inventories [-17 billion cubic feet (BCF)], according to Fitch Ratings. Following last year's event, total gas inventories dipped below 850 BCF at the end of March 2013, far below their five-year average of approximately 1.8 trillion cubic feet. Strong supply growth since that time has allowed for rapid rebuilding of inventory.

Fitch expects natural gas prices to remain subdued over the next several years, excluding short-term volatility from weather-related demand. Several factors are likely to drive this trend in North America, including: large amounts of associated gas coming from liquid shale plays; continued improvements in well designs and completion technology, which should help lower the marginal cost of supply; and the fact that many onshore producers can earn a full return on their cost of capital at historically lower prices.

US gas prices could be indirectly pushed higher by the recent drop in oil prices. Reduced oil-directed drilling in North American shale linked to the recent $30/barrel drop in crude prices might eventually lead to a drop in associated gas supplies. Associated gas, which is produced as a byproduct of drilling for oil, continues to provide a significant part of North America's gas supply, as many E&P companies' drilling decisions continue to be dominated by oil economics in shale plays. The recent drop in Baker Hughes North American oil rig count (declining a total of about 35 rigs, or about 2% since early October) suggests lower pricing has begun to impact capex budgets committed to looking for oil. A longer, more prolonged slump in oil prices might accelerate this trend and lead to further reductions in associated gas supplies, and therefore, greater support for natural gas prices.

Since April, gas storage net injections have averaged 84 BCF per week, according to US Energy Information Administration (EIA) statistics, well above the long-term average of 65 BCF per week. According to the latest EIA natural gas storage data, total gas inventories as of Nov. 14 stood at approximately 3.6 TCF. This is around 200 Bcf (or approximately 6%) below the five-year average and is a sizable improvement from earlier deficits of nearly 1 BCF.

Spot and forward prices reflect a well-supplied market. Current spot natural gas prices are approximately $4.40/thousand cubic feet (mcf), versus prices above $6/mcf this past winter. The longer end of the forward curve continues to reflect expectations of ample supply from low-cost shale plays, with 2018 Henry Hub natural gas priced at approximately $4.20/mcf. This is consistent with Fitch's long-term natural gas price deck of $4.50/mcf as contained in our energy outlook.


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