This report covers the week ending November 3, 2017. Daily data for October 28 to November 2 is estimated. Daily data for November 3 is forecast. To read last week’s report, please click here.
Total Supply/Demand Balance
We estimate that aggregate demand for American natural gas (consumption + exports) totaled around 520 bcf this week (up 8.0% w-o-w, and up as much as 15.0% y-o-y). The deviation from the norm stayed positive and actually increased from +16% to +19% (see the chart below). According to our calculations, aggregate demand for U.S. natural gas (on a weekly basis) has been above 9-year norm since February 24, 2017. Total number of cooling degree days was below the norm, while the number of heating degree days was slightly above the norm for most of the week. Natural gas consumption, therefore, remained strong (some 12% above the norm). Total exports (i.e., pipeline flows to Canada and Mexico + LNG exports) declined marginally w-o-w but were still up some 40% y-o-y. According to Marine Traffic data, no less than 4 LNG tankers (total natural gas carrying capacity of 13 bcf) departed from Sabine Pass over the past seven days.
* norm defined as simple average over the last nine years. Source: Bluegold Research
We estimate that dry gas production has been expanding in annual terms for 22 consecutive weeks now. This week, the annual growth rate has accelerated to more than 7% due to stronger wellhead production in the Eastern part of the U.S. and also in the onshore Gulf Coast region. We expect this trend of positive annual growth to continue partly due to base effect and partly due to genuine recovery in output. However, we would also expect it to slow somewhat in the coming weeks but remain positive. Total aggregate supply of natural gas (production + imports) averaged around 83.3 bcf per day for the week ending November 3 (up 7% y-o-y). Overall, total supply/demand balance should be positive and is estimated to reach +70 bcf, which is the smallest weekly balance since August 25. The volume is some 35 bcf smaller than a week ago and is 32 bcf below 5-year average for this time of the year (see the chart below). In absolute terms, and with all other things being equal, this kind of volume is bullish for natural gas prices, since it is significantly below last year’s level and also below historical norm. That does not mean, of course, that prices will necessarily increase. If you want to know how we are navigating through the current market environment and see our trading exposure, consider signing up for our exclusive content (link below).
Note that the total Supply-Demand Balance does not equal storage flows. Source: Bluegold Research
This Thursday, the EIA reported an injection of 65 bcf, just slightly above our expectations of 64 bcf. Total storage now stands at 3,775 bcf, which is 41 bcf (or 1.07%) below 5-year average for this time of the year. To see our storage forecasting track record, please click here. Despite an injection figure being ostensibly “bearish” (i.e., above market consensus), natural gas rallied on Thursday. We warned our clients that market was significantly underestimating future consumption levels and may begin to adjust its excessively bearish expectations. This is the main reason why we have closed all our short positions on November 1. Our computer models indicate that the road ahead will be bumpy with a lot of range-bound price action. This should provide plenty of trading opportunities for both bulls and bears.
Currently, we expect EIA to report an injection of 21 bcf next week (final estimate will be released next Tuesday). Our latest projection is higher than the comparable figure in the ICE’s latest report for EII-US EIA Financial Weekly Index, implying a possibility for a bearish surprise. Overall, at this point in time, we expect storage flows to average -15 bcf over the next three reports. Natural gas inventories deviation from 5-year average should decline from -1.07% today to -3.02% for the week ending November 17. We are updating our forecasts on a daily basis. If you wish to receive regular update on key natural gas variables - production, consumption, exports, and imports, consider signing up for our exclusive content.
Check out the evolution of storage forecasts in the chart below. Notice that our 3-week storage outlook remained essentially flat over the past 10 days. The total for three reports went down only 6 bcf (from -38 bcf on October 20 to -44 bcf on November 2). The market, however, remained overly focused on the short term and terrified by strong production. This situation has nurtured excessively bearish mid-term expectations in the marketplace, which are now much easier to disappoint rather than to satisfy. Trading natural gas futures and ETFs is a more complicated exercise than simply following storage forecast. We continue to navigate through the market action and update our clients on our trading exposure on a daily basis. Consider signing up, if interested.
Source: Bluegold Research
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.
Additional disclosure: We are long natural gas futures (winter contracts) and short in natural gas cash.