The drivers behind the 2016 natural gas price recovery are still very much in play as the market transitions into the winter. Higher exports and power generation load combined with falling domestic production will continue to impact prices as winter heating demand begins to ramp up. A strong withdrawal season is likely in all but the warmest of winter scenarios, which would theoretically set the stage for a higher price environment to emerge in 2017. However, the behavior of the production and power generation sectors will be of chief importance in determining the 2017 market story.
On the production side, 2016 was marked by historically low drilling that resulted in falling output for the first time in the Shale Era. Most expect production growth to resume in 2017, but forecasting the timing and magnitude of that turnaround is very difficult. Drilling began to show signs of life early in the first quarter, with the gas-directed rig count rising to a nine-month high of 108 as of Oct. 21. Activity remains far behind year-ago levels and even further behind the five-year average, so further recovery is likely necessary to kick start meaningful growth. Signs of strong production early in 2017 could go a long way in keeping a lid on the market, but further declines would be bullish for pricing.
The power generation landscape in the U.S. has shifted away from coal toward natural gas over the past 10 years. Every year sees more coal units permanently retired and replaced with new gas-fired capacity. The sector consumed natural gas at a record pace in 2016 due to low gas prices and hot summer weather. Natural gas is expected to exceed coal&rsquo;s share of the power generation mix this year for the first time. In a higher price environment next year, it will be interesting to see how demand from this sector responds. A portion of the load is &ldquo;price sensitive,&rdquo; meaning that the economics of delivered coal vs. delivered natural gas have some impact on usage. Demand from power generators will likely need to be lower in 2017 to keep the market in balance; if the industry is slow to scale back consumption, it could raise the ceiling on prices.
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&nbsp;
Natural Gas Prices
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24-Oct-16
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24-Sep-16
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24-Oct-15
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NYMEX
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$2.831
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$3.057
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$2.062
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NNG Ventura
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$2.810
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$3.015
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$2.265
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Calif. Citygate
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$2.875
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$3.090
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$2.350
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Higher exports and power generation load combined with falling domestic production will continue to impact prices as winter heating demand begins to ramp up. 

Lower production, higher demand affects natural gas prices

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