This Week Is A Barn-Burner For Natural Gas Consumption

| About: The United (UNG)

Summary

Natural gas futures were hit by selling pressure yesterday.

But this week's CDD-adjusted forecast is a barn-burner.

The storage glut is going to deflate further, supportive of futures prices.

Natural gas futures prices took a 7.5% hit Tuesday. But that followed an almost relentless surge of more than 80% from the end of May, up bottom in March.

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The National Oceanic and Atmospheric Administration's (NOAA) Climate Predict Center (CPC) released its forecast for the week ending July 9th (two days late this week). Based on the CPC data for each of the "lower 48 states," we adjusted the predicted cooling degree days (CDDs) based on relative consumption of natural gas at electric utilities (see Methodology following the conclusion).

The adjusted projections show CDDs up 26% v. normal temperatures and up 27% from the same week last year.

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For the year-to-date, CDDs are up 12% v. normal but off 3% v. the same weeks in 2015.

For the week ending June 24th, the EIA had reported that storage had built by just 37 bcf, which was 36 bcf lower than in the same week last year.

Conclusions

Though natural gas futures prices have staged an impressive recovery, temperature projections for this week are likely to burn off more fat from the storage glut. However, given the July 4th holiday this week, commercial use may be a little lower than during a normal work week experiencing the same temperatures.

Methodology

The National Oceanic and Atmospheric Administration (NOAA) provides ongoing assessments and forecasts of population-weight cooling degree days (CDDs). 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.

Degree days are the difference between the daily temperature mean (high temperature plus low temperature divided by two) and 65°F. If the temperature mean is above 65°F, we subtract 65 from the mean and the result is cooling CDDs.

Example: The high temperature for a particular day was 90°F and the low temperature was 66°F. The temperature mean for that day was:

(90°F + 66°F)/2 = 78°F

Because the result is above 65°F:

78°F - 65°F = 13 cooling degree days.

The cooling degree season runs from January 1st through the end of December each year.

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 produces a population-weighted CDD assessment and forecast for every state and combines them to create a U.S. total. I take this 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.

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To prepare quantitative projections of future consumption, the first step is having a model that relates degree days to demand. In my model, I use three factors: heating degree days, cooling degree days, and GDP.

With just these three factors, I have a 97% multiple regression fit since 2012. This means these factors, each of which is highly statistically significant (as indicated by the T-statistics), explains 97% of the monthly variation in demand (see graph below).

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Some say just look at NOAA's 8-14-day map to get an idea of where things are going. But it does not provide any hard quantitative data.

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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.