Natural Gas Faces The Perfect Storm

Summary

  • An extreme set of events might be in place that could lead to a historic outcome this summer.
  • While we are far from a certainty, the odds favor all these events coming together.
  • The events combine high natural gas output, a mild winter, high natural gas inventories, the usual weather behavior after a strong El Niño and desperate producers.

A natural gas pipeline explosion. The pressure will be high on natural gas this summer.

Natural gas (NYSEARCA:UNG) is already deeply punished as it is. Excess production is leading to high inventories and the situation wasn't helped by a warm winter. Greater demand for electricity production, exports to Mexico and now LNG shipments have not been able to contain the rising inventories.

Part of this was already known, when I wrote my article, Natural Gas: How To Play El Niño. We knew that winter was still likely to be warm, on account of the still fading 2015 El Niño. We also knew a respite could come around late March/early April as winter subsides, but surprising demand for electricity remains. This remains true.

However, winter was weak enough that inventories are now at a level that's uncomfortably high. Indeed, inventories are now over the five-year high of their range, up 67.4% from last year's levels and 48.3% from the five-year average:

Source: EIA

These inventory levels are so high, they present a significant challenge to the coming injection cycle.

You see, the previous five-year high for these inventory levels was not that much lower from where they stand today. It came during 2012 when natural gas also bottomed during April. However, there are two major differences between now and 2012:

Difference #1 - First Large Instance Of Dispatch Switching

2012 was helped by the first large contribution to demand from dispatch switching. That is, during 2012 natural gas prices fell so hard, natural gas-fired electricity generation jumped ahead of coal-fired generation in the dispatch order in many different power markets. This led to a large increase in natural gas demand that previously didn't exist.

2016 cannot, however, count on as large as an increase in electricity-generation demand. This is so because 2015 already saw

This article was written by

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