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Diminishing gas glut

Falling production and higher demand should tighten the US natural gas market in 2017

US gas output tumbled in 2016. The Energy Information Administration (EIA) expected production from the country's seven most prolific regions to fall to 46.95bn cubic feet per day in December. That's down from almost 48.18bn cf/d in February. For all of 2016, the EIA expects total gas output to fall by 1.4bn cf/d, to 77.3bn cf/d. It may at last bring American gas supply's gravity-defying act to an end.

In fact, US natural gas production has been contracting since mid-2015-reflecting a decline in conventional production and shale oil-associated output. Associated gas production has dropped in most of the country's crude-rich plays over the past two years, including the Eagle Ford, Bakken and Niobrara areas.

But the EIA expected that gas production started rising again in November as rig numbers increased and infrastructure capacity connecting production with consumers came on line. These buildouts could boost output by as much as 2.9bn cf/d in 2017, the EIA said. While US gas rig numbers have begun to increase, according to Baker Hughes, at just 116 in November they remained around 40% below year-earlier levels. Some analysts are not as optimistic as the EIA. Bank of America Merrill Lynch expects average dry gas output to fall by around 0.6bn cf/d in 2017 before contracting by another 8bn cf/d in 2018.

Whether US gas output recovers next year or not, domestic demand is rising-so the market should tighten. The EIA expects US gas consumption to rise by around 370m cf/d, or 0.5%, in 2017, reaching 76.06bn cf/d. Investments in methanol and ammonia plants are boosting consumption, while liquefied natural gas exports are also pulling on supplies.

BAML expects demand for LNG exports will reach 2bn cf/d by the end of 2017. By 2018 demand for exports will more than double, to 5bn cf/d.

Even if domestic gas output increases in 2017 more LNG shipments and pipeline exports to Mexico should support Henry Hub prices. The EIA expects prices to average $3.12 per million British thermal units in 2017, up from around $2.50/m Btu in 2016. BAML and Energy Aspects see Henry Hub reaching around $3.50/m Btu and $3.30/m Btu in 2017.

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