The hotter than normal summer is taking its toll on natural gas in storage. I first wrote about the impact a hot summer could have on natural gas storage levels at the end of May. The heat looks to be continuing, and there is a strong possibility natural gas in storage could end hundreds of billions of cubic feet below the five-year average entering the winter season in November. It might even end up below the five-year minimum. If that happens, then it would be very significant because natural gas supply and demand is higher than it was five years ago.
According to AccuWeather, significant amounts of heat will roll into the Northeast in late June and early July. Here is a visual of the forecast:
The real-feel temperatures will be much higher than actual temperatures. In addition to high humidity levels, the winds will stay low, juicing how hot it will feel. Accuweather further states, "Temperatures are likely to remain at or above average through next week and into next weekend." Additionally, "there are no signs of any big blasts of cool weather with low humidity any time soon." It looks like we have a hot summer upon us. The demand for electricity for cooling is remaining well above normal.
The EIA Natural Gas Storage Report states, "Working gas in storage was 2,074 Bcf as of Friday, June 22, 2018, according to EIA estimates. This represents a net increase of 66 Bcf from the previous week. Stocks were 735 Bcf less than last year at this time and 501 Bcf below the five-year average of 2,575 Bcf. At 2,074 Bcf, total working gas is within the five-year historical range." Natural gas is 19.5% below the five-year-average as of June 22, 2018. What is eye-popping is that the Midwest is reported to be 27.5% below the five-year average.
Here is where natural gas in storage was five weeks ago when I first alerted the market to the impact the heat could have: "Working gas in storage was 1,629 Bcf as of Friday, May 18, 2018, according to EIA estimates. This represents a net increase of 91 Bcf from the previous week. Stocks were 804 Bcf less than last year at this time and 499 Bcf below the five-year average of 2,128 Bcf. At 1,629 Bcf, total working gas is within the five-year historical range." Notice that natural gas in storage has gone from 499 Bcf below the five-year average to 501 Bcf below the five-year average. Storage has made no progress over the last five weeks.
Here is a graph of the five-year average storage report for the lower 48 United States:
According to the EIA, the five-year minimum storage level entering the winter season is 3,606 Bcf. If the heat continues, there is a good probability that storage will not climb that high before the winter season. Additionally, the natural gas economy is larger than it was five years ago. Therefore, the actual total amount of natural gas needed in storage to safely get through the winter is higher than it was five years ago. If the upcoming winter is colder than normal, then parts of the country could run out of natural gas storage before the winter is over.
So far the natural gas futures market continues to shrug off the potential crisis looming from inadequate storage entering the next winter. One reason is that there would be a potential crisis only if the upcoming winter is actually colder than normal, creating enough demand to use up most of the natural gas in storage.
Another reason is that the market seems to be focused on the growth in supply. Here is a look at the supply growth on which the market is focusing:
The chart above shows marketed production for the month of April 2018, totaled 2,574 Bcf. That is up 77 Bcf, or 2.5 Bcf per day, from five months earlier in November of 2017. But natural gas in storage is the ultimate determinant of supply versus demand. If supply is up, but storage is falling behind, then demand is up more than storage. And weather is a part of demand.
Natural gas futures could potentially spike between now and the end of the winter. The market may grow concerned soon as natural gas gets closer and closer to the five-year minimum. Or, the bears that are in control of this market may decide to ride it out and keep downward pressure on the market until winter weather plays its hand as colder than normal, or warmer than normal. The point is, investors should pay attention to what is unfolding if the next winter is colder than normal. A colder than normal winter could cause a very significant increase in the price of natural gas as parts of the county run out of natural gas storage.
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.