Natural Gas Storage Builds On Mild Weather, Moderated Hurricane Impact

| About: The United (UNG)

Summary

Mild temperatures imply a much larger storage build than in prior weeks.

The hurricane impact introduces more uncertainty into estimates.

But days of supply are comparable to the year-ago level.

In the week ended Sept. 30, the Energy Information Administration (EIA) reported that working gas in storage rose by 80 billion cubic feet (bcf) to end at 3,680 bcf. Although this figure was 1.6 % from the ending September 2015 level, according to EIA's Natural Gas Monthly, the inventory coverage was actually slightly lower than a year ago, when adjusted for consumption (i.e., days of supply).

Working gas in underground storage, Lower 48 states

Historical Comparisons

Stocks billion cubic feet (Bcf)

Year ago (09/30/15)

5-year average (2011-15)

Region

09/30/16

09/23/16

net change

implied flow

Bcf

% change

Bcf

% change

East

899

874

25

25

856

5.0

860

4.5

Midwest

1,045

1,014

31

31

975

7.2

982

6.4

Mountain

237

233

4

4

205

15.6

197

20.3

Pacific

318

318

0

0

358

-11.2

343

-7.3

South Central

1,181

1,161

20

20

1,213

-2.6

1,091

8.2

Salt

289

275

14

14

328

-11.9

257

12.5

Nonsalt

893

885

8

8

885

0.9

834

7.1

Total

3,680

3,600

80

80

3,606

2.1

3,475

5.9

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According to the National Oceanic and Atmospheric Administration (NOAA), U.S. population-weighted cooling degree days (CDDs) fell to just 26 in the week ended Oct. 6. This is the closest data point to the 9 a.m. CST cutoff for measuring storage for the week ending Oct. 7.

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Using my methodology (see below, which I have recently updated), I estimate use-weighted CDDs will total 43 for the week and use-weighted HDDs will total 29 for the week. In October, storage is impacted by both HDDs and CDDs.

Based on my regression, this implies a build of 98 bcf for the week. Storage should be reported around 3,778 bcf in next week's report.

Conclusion

The model-estimated build in storage is based on inputs that were not adjusted for any impact of Hurricane Matthew. It is known that Florida's electric grid was impacted in the hours before the EIA cutoff time, and so that introduces more uncertainty into the estimate.

On a year-to-year basis, estimated ending storage is about 1% higher, but on a days-of-supply basis, it's about the same.

Methodology

CDDs 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.

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.

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 natural gas use at electric utilities. In that way, I get a more accurate picture of Natural Gas Use-Weighted CDDs than population-weighted CDDs.

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 through August 2016. 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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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.