Over three weeks ago we looked at the Year-over-Year (YoY) U.S. natural gas storage balance and submitted that this metric would likely be the key driver in front-end natural gas pricing over the short term.
With today’s EIA Weekly Storage Report we learn that U.S. natural gas inventories are 296 Bcf higher YoY as of December 23 – only 5 Bcf off from the chart presented on December 7. That’s a surplus that is 256 Bcf wider than the last article while price for February delivery is off 14% over the same period.
Looking forward, we see further, large expansions of this YoY storage surplus and its continued presence at the forefront of this market’s concern for rest-of-2012 pricing.
The most arresting, if not elegantly-simple, measure of this market’s near-term problem might not be the following chart, but we’d challenge it
These are the aggregate U.S. storage draws for weeks 2 through 6 of the year, ranked, since weekly statistics began in 1994. The comp period coming up is the largest in history for the period, at 1,038 Bcf.
What’s worse? We forecast that we will go into this period with a YoY surplus of around 350 Bcf.
Using back-of-envelope techniques and reasoning, let’s argue that weeks 2-6 in 2012 will draw at the average of the years presented: 764 Bcf. That’s 274 Bcf less than last year, on top of an existing forecasted 350 Bcf surplus, driving U.S. walking into mid February with around a 625 Bcf YoY surplus. And that 764 Bcf draw would require far cooler temperatures, relative to normal, in Jan, than we experienced in Nov-Dec. In other words, we pull the average 764 Bcf only if temperatures get more bullish. One more way: a bullish result is a 625 Bcf surplus at February 10.
This would be the highest YoY surplus since June 2009 and the highest surplus for the first half of February since 2002.
Simply put, the market will not tolerate a U.S. storage balance of 2,570 Bcf come February 10 (+625 to last year and imply a 2,100 March 31 level at 5-yr average use from there). Either weather helps out or price does.
If next week’s forecasted eastern trough does not hold or refill, price will be tasked with synthesizing the cold. That means FEB-MAR materially-sub $3.00 with assessment checks for response every 10 cents.
I see virtually nothing to help flat-price gas pricing in the FEB-MAR period; “oversold” risks finding new definitions here without some weather. I see all sorts of things supportive for far further tenors, 2014 and beyond (boosted by the dynamic that what solves the 2012 problem supports the 2014+ case). I have no idea what to think of Summer 2012 or 2013 at this time other than the market is rather long these positions given the well-broadcasted light hedge levels among scores of producers in those frames. I think bear spreads (positions where traders seek widening of price differentials along the curve) finally begin to pay, if only because the situation up front appears to be staging to become quite acute.
I think that producing names with light hedge levels face a serious situation in 2012, as this market may have Mother Nature’s grace to finally solve this overproduction problem via price and pain.
The U.S. Gas Economy has not traveled through a sustained period of mild temperatures in the winter or summer seasons since the advent of the Shale Era. It’s been due.
One thing supportive? We’ve got an extra day in February to whittle this thing down.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.