More Evidence For Higher Nat Gas Prices Ahead

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Summary

Temperatures are forecast higher again this week where it counts most.

Method is to weight CDDs by nat gas-fed electric plants.

Using population or total nat gas use weights are inaccurate.

8-14 day map looks positive but is a simplistic indicator.

As I indicated in my recent article, Natural Gas Prices Need More Heat to Sizzle, the rebound in nat gas futures prices have been supported by hot weather, and any respite could cause a reversal. U.S. temperatures are again forecast to be hotter-than-normal, so that should provide more coverage for the rebound.

Methodology

The National Oceanic and Atmospheric Administration (NOAA) provides ongoing assessments and forecasts of population-weighted cooling degree days (CDD). Degree days are based on the assumption that when the outside temperature is 65°F, we don't need heating or cooling to be comfortable.

Cooling degree days affects natural gas use because it is a feedstock to electric utilities. Electricity powers air conditioners.

Over time, natural gas has been replacing coal as a feedstock to utilities. It follows that to understand how summer temperatures affect natural gas consumption, it is important to know where utilities are burning natural gas and how much.

NOAA's population-weighted CDDs are inaccurate because the use of natural gas as a feedstock is not strictly based on the population distribution in the U.S. I take NOAA's state-by-state CDD data and weight each state by its relative nat gas use at electric utilities. In that way, I get a more accurate picture of Natural Gas Use-weighted CDDs.

To illustrate, the chart below compares the population-based weight for each state to the natural gas used at electric utilities weight. Three of the largest discrepancies are for Texas and Florida (higher use) and California (lower use).

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For this week ending July 2nd, projected CDDs are 13% higher v. normal and 13% higher v. last year.

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For the season-to-date (beginning January 1st) through June 25th, CDDs are 13% higher than normal and 6% lower than 2015 over the same weeks.

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Looking further out, NOAA's 8-14 day outlook is presented on the map below. However, the map does NOT indicate the level of CDDs.

The colored shading on the map indicates the degree of confidence NOAA has in the category indicated, where "B" and blue colors indicate "below-normal" and "A" and orange-red colors indicate "above normal." The darker the shading, the greater is the level of confidence. The numbers labeling the contours separating different shades gives the probability that the indicated category (A, B, or N) will occur.

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According to NOAA:

The probabilities of all three categories are implied on the map, and sum to 100%. The forecast probabilities given on the map generally fall far short of complete confidence (100%) in any single category. When the probability of the above (A) or below (B) category is greater than 33.33% by some amount, the probability of the opposite category declines by that amount, while the probability of the middle category remains at 33.33%. In the event that the N category is greater than 33.33%, the probabilities of both the "A" and "B" categories is each reduced by 1/2 the amount that the "N" category exceeds 33.33%. When the probability of "A", or "B" reaches 63.33% or higher, the odds of the opposite category reach a minimum allowed value of 3.33%, while the odds of the middle category are allowed to drop below 33.33%.

The dashed contours on the map give the average of the temperature over the set of 30 observations for the calendar 7-day period during 1981-2010, in degrees Fahrenheit."

The map shows higher probabilities for above-average temperatures for Florida, California and much of Texas. These three states consume the most natural gas at electric utilities. But the map does not provide temperatures or CDDs and must, therefore, be interpreted as a simple indicator, which in this case, is favorable. But, I do not have historical forecasting results to assess how accurate these forecasts have been.

Conclusions

The CDD forecast is again supportive for natural gas consumption and therefore prices. This is consistent with the long-term forecast I presented back in April.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.