Back in the first week of December, we were one of the first to highlight the risks associated with the potential for an exploding year-over-year U.S. natural gas storage surplus. We were fortunate enough to nail it, with the prompt May contract off 42% since publication. And, as always, the price of natural gas is highly influential in the equity prices of companies that deal in it, directly fateful for ETFs/ETNs (UNG, UNL, GAZ) that price against it. Understanding where the price of U.S. natural gas may be heading is a big tool in the energy equity space.
So, now we've got this 900 Bcf surplus, with perspective begging to remind you that this amounts to the total 5-yr average build for the 2 biggest injection months of the year, May and June, plus another 100 Bcf kicker. In other words, we've started out build season with a surplus that is equal to 42% of our 5-yr average total seasonal build.
But for low prices ushering in a gas revolution in the U.S. Power Economy - we now burn enough gas to meet the nation's electrical needs to find ourselves compliant with the EPA's new stringent regulations ... for 2015 - that surplus would be around 350 Bcf bigger. Price is working and outpacing policy, fancy that ...
As it stands today, we're burning about 4.5 Bcf more natural gas, per day, to meet the electrical demand needs of the U.S. Power Economy, than we were this time last year, weather adjusted. This represents an enormous share grab at the hands of natural gas, which went from 20% to 27% of the national generation mix in just one year - sending coal off the grid, from 47% to 38%.
So, will this heretofore unseen shift in generation mix be enough to balance this market? Will it result in U.S. chewing through this surplus, even possibly reversing one of the most sustained bear markets in any major commodity? As always, it depends.
Recently, there's been chatter that this 4.5 Bcf/day increase amounts to U.S. shaving this surplus completely down in … 900/4.5 = 200 days, or the 3rd week in October. Simple enough, tonight's new all-time low in next winter's strip, at $3.09/MMBtu, must be a pretty compelling opportunity. But this calculation implicitly assumes that we won't be adding, or subtracting, from the surplus owing to the inevitable changes that we will see in this summer's weather versus last. To chew off the surplus in 200 days via the electrical revolution, and keeping pricing around the $2 level, we'll have to experience very nearly the same weather we saw last summer.
That could be a big mission, given the fact that the heart of last summer, June through August, was the 2nd hottest on record - 116th hottest out of 117 years of NOAA records.
Some will argue that we could in fact see an even larger share than the observed 4.5 Bcf/day of weather-adjusted additional burns as it gets hotter into the summer - and we may. But for that share to increase, weather adjusted, as it gets hotter, there have to continue to be idle NG-fueled power plants available to bring into the mix. Idle gas plant availability and loads/temperatures are very much inversely correlated, and it is more accurately argued that the current 4.5 Bcf/day actually risks realizing smaller as we get into the hotter days of July and August. After all, at max possible loads, running the entire fleet of all power plants of all fuel types, the actual generation mix would match the mix of installed capacity, reverting the share gains in gas back towards 0 Bcf/day.
The point that many bottom-hunters are missing is: we are going to have an increasingly difficult time erasing the surplus by the beginning of next winter the more this summer's weather reverts back from one of the very few hottest-on-record last year, towards something closer to normal this year. Risking a face plant: this summer will be cooler than last.
It is impossible seeing U.S. adding to the current 900 Bcf surplus by the end of this build season, simply because keeping it constant would run U.S. well through national storage capacity. But it is nearly equally difficult to see U.S. completely erasing it by next winter's start. Our modeling points to a 550 Bcf surplus by Halloween, assuming static supply dynamics, should the absurd happen and we register a normal-temperature regime this summer. But that brings U.S. right into estimates for national storage capacity near 4,375-4,400 Bcf.
So, will the efficacy of price, the ushering in of the largest NG share of power generation in history, clear this market? It will greatly depend upon the weather, as a normal-temperature summer will more than likely, require further gains in price-induced gas demand and/or the start of meaningful, sustained, reductions in supply brought about by still lower pricing.
Careful in assuming the math is there to easily erase this surplus and that the low in natural-gas pricing is, if not here today, just around the corner.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.