Total demand for American natural gas is up 9.0% y-o-y to 73.0 bcf per day.
Total natural gas supply is up 16.0% y-o-y to 93.2 bcf per day.
We currently expect EIA to report an injection of 83 bcf this week.
Flows to liquefaction at Cove Point have resumed after a three-week maintenance.
Dry gas production remains strong, but has been unable to set a new all-time high for three weeks now.
This report covers the week ending October 12, 2018.
Total Supply/Demand Balance
We estimate that aggregate demand for American natural gas (consumption + exports) totaled around 511 bcf for the week ending October 12 (up 1.5% w-o-w and up as much as 9.0% y-o-y). The deviation from the norm stayed positive, but declined marginally from +28% to +26% (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.
Last week, the weather conditions cooled down significantly - particularly in the Central and Midwest parts of the U.S. We estimate that the number of nation-wide heating degree days (HDDs) surged by no less than 60.0% w-o-w for the week ending October 12, while the number of cooling degree days (CDDs) dropped by 20% w-o-w to the point where they are no longer having any meaningful effect on consumption. In addition, non-degree-day factors - such as higher nuclear outages - spurred extra consumption in the Electric Power sector. Overall, total energy demand (measured in total degree days) was above last year's level by around 12%.
Total exports rose by 4% w-o-w, mostly due to stronger LNG sales, while pipeline outflows into Canada and Mexico were both down. According to Marine Traffic data, Sabine Pass and Cove Point together served no less than 6 LNG tankers last week (total natural gas carrying capacity was 21 bcf). After a three-week maintenance, flows to liquefaction at Cove Point have resumed on October 12. In annual terms, total exports were up 10.0%.
* 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 71 consecutive weeks now. However, the daily rate of output has been unable to set a new all-time high for three weeks now. Currently, we project that dry gas production will average 87.9 bcf/d in October, 87.2 bcf/d in November, and 87.0 bcf/d in December. The aggregate supply of natural gas (production + imports) averaged around 93.2 bcf per day for the week ending October 12 (up 16.0% y-o-y, but down 0.5% w-o-w). Overall, total unadjusted supply/demand balance should be positive at around 140 bcf. The volume is some 12 bcf smaller than a week ago, but 15 bcf above 5-year average for this time of the year (see the chart below).
Note that the total Supply-Demand Balance does not equal storage flows. Source: Bluegold Research
In the simplest of terms, and with all other things being equal, this kind of volume is bearish for natural gas prices, since it is above last year's level and also above the historical norm. However, the market is forward-looking, and this week's data is, to some extent, irrelevant for traders. The price is often a function of a 2-week weather forecast, but because we are also in the midst of a shoulder season, other factors play an important role - notably, end-of-season (EOS) storage outlook and winter forecast. At Bluegold Research, we provide a daily (early morning and afternoon) update on the weather forecast as well as a full update on the end-of-season storage outlook. In addition, we publish the latest results of the extended-range ECMWF model (twice per week). Consider singing up, if interested (see the link below).
This Thursday, the EIA reported an injection of 90 bcf, exactly in line with our prediction (see this article). Total storage now stands at 2,956 bcf, which is 607 bcf (or 17.04%) below the five-year average for this time of the year. Currently, we expect the EIA to report an injection of 83 bcf this week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +60 bcf over the next three reports. Natural gas inventories' deviation from the five-year average should expand from -607 bcf (-17.04%) today to -644 bcf (-17.03%) for the week ending October 26. Notice that the deficit is projected to expand in terms of volume, whereas percentage-wise, the deficit is projected to remain broadly unchanged.
On balance, the current situation in the market is rather complex. We see a mix of bullish and bearish factors:
- EOS storage level (for the week ending Nov. 2) is projected to be record low - just 3,182 bcf (according to our latest calculations), 647 bcf below the five-year average. This is a bullish (strategic) factor.
- Dry gas production is record high and still growing (unconfirmed data suggests that daily output rate is running at pace of 85.6 bcf/d). This is a bearish (strategic) factor - especially in the long-term. Indeed, forward curve is predominantly trading below $3.000 per MMBtu, while Henry Hub strip is still down y-o-y.
- Latest dry gas consumption forecast was revised higher. The latest weather models continue to indicate above normal HDDs and TDDs over the next 15 days, and the change from Friday is bullish. This is a bullish (tactical) factor.
Navigating through this market environment will require a lot of skills because this is not your classical "over-supply" or "under-supply" market situation. Conflicting signals create uncertainty and uncertainty creates volatility. However, volatility is actually a good news for us, traders, because we make money out of volatility. Over the past two weeks, we have executed a total of 15 trades. So far, only two were closed at a loss, while 13 were closed at a profit.
Thank you for reading our weekly report. We also write a daily update of our forecast for key natural gas variables: weather, production, consumption, exports, imports and storage. Interested in getting this daily update? Sign up for Natural Gas Fundamentals, our Marketplace service, to get the most critical natural gas data. In addition, every Sunday, we publish three special reports: "Trends in the U.S. Electric Power sector", "Trends in Global LNG Market", and "Global Oil Products Inventories".
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.