The U.S. Energy Information Administration should report a slightly larger change in natural gas storage this week compared to the week prior. We anticipate an injection of 55 bcf, which is 1 bcf higher than the comparable figure in ICE's latest report for the EII-U.S. EIA Financial Weekly Index. It's also 24 bcf higher than a year ago, and 7 bcf lower than the five-year average for this time of the year.
Last week, the number of total degree days (TDDs) dropped by around 7% week over week as cooling demand subsided in most parts of the country, but still remained above the norm in most parts of the country. We estimate that total energy demand was only 1% above last year's level. Please note that heating degree days (HDDs) have reached the point where they are no longer relevant and have no effect on natural gas consumption. Cooling degree days (CDDs) now have a disproportionately stronger effect on consumption, and traders should be paying attention to changes in CDDs.
This week, the weather began to heat up again. We estimate that the number of CDDs will increase by 10.0% week over week during the week ending July 20. Cooling demand should be no less than 5% higher vs. a year ago.
Source: Bluegold Research
The latest numerical weather prediction models are returning some bullish results (in absolute terms):
- The ECMWF extended-range model (issued on July 16) projected above normal CDDs in all five forecast weeks (July 27 through Aug. 24). However, the results were less bullish (compared to the previous forecast, issued on July 12).
- The latest CFSv2 long-range model is projecting above-normal CDDs in both July and August.
- The latest ECMWF 00z Ensemble and GFS 00z Ensemble midrange models are both projecting above normal CDDs over the next 15 days (July 18 through Aug. 2).
However, there is one very important factor that you need to take into account. Absolute values (such CDDs, HDDs and TDDs and their deviation from the norm) might not matter much in trading. It is assumed that absolute values determine the price regime, while the changes in absolute values determine the price direction. It is therefore further assumed that absolute values are already reflected in the current prices, whereas changes are not. As such, a trader should pay special attention to the actual changes in the forecast if he or she wants to anticipate the price direction.
Even after the extended-range ECMWF weather model issued its bearish revision, our analysis still indicates that the natural gas storage level is likely to drop below the five-year minimum by Aug. 3 (see chart below). At this moment in time, we also expect the storage "deficit" (relative to the five-year average) to remain essentially flat for the next 12 weeks. We also expect the annual storage "deficit" to remain at no less than 500 bcf by Sept. 28.
Natural Gas Storage Forecast
Source: Bluegold Research (this chart is updated for our subscribers on a daily basis).
However, if we look at the most recent ICE reports for financial gas futures (we use these reports as indicators for market's storage expectations), we will see that there is currently a "bullish gap" between our storage projections and what the market expects. The market currently prices in 258 bcf worth of injections over the next five reports. However, we project 224 bcf over the same period.
Furthermore, the market expects EOS storage to finish at 3,488 bcf, while our running EOS index currently stands at 3,298 bcf. Therefore, we do not see any compelling reasons to be bearish on natural gas at this point in time.
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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.