January 24, 2019, Natural Gas Storage Report: Last Bearish Draw

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Includes: BOIL, DGAZ, FCG, GASX, GAZB, KOLD, MLPG, UGAZ, UNG, UNL
by: Bluegold Research
Summary

This Thursday, we expect EIA to report 2,380 bcf of working gas in storage for the week ending January 18.

We anticipate to see a draw of 153 bcf, which is 120 bcf smaller than a year ago and 32 bcf smaller vs. 5-year average.

The weather outlooks is bullish – large storage draws are coming.

Dry gas production has failed to set a new all-time-high for 53 consecutive days now.

The Weather

Last week, the number of heating degree-days (HDDs) rose by 17.0% w-o-w. However, we estimate that total energy demand (as measured in total degree-days - TDDs) was approximately 20% below last year's level.

This week, the weather conditions have cooled down significantly across the country. Specifically, heating demand increased, most noticeably, in the Midwest and Northeast parts of the U.S. We estimate that the number of HDDs will rise by around 18.0% w-o-w in the week ending January 25. Indeed, total energy demand (measured in TDDs) should be no less than 40% above last year's level. Next week, the weather conditions are expected to cool down even more. The number of HDDs is currently projected to jump by another 10.0% w-o-w. In annual terms, the increase will be even more violent (+40%), while the deviation from the norm would rise to almost +30% (see the chart below).

energy demand total degree days forecast

Source: Bluegold Research estimates and calculations

Total Demand

On average, the latest numerical weather prediction models are showing above-normal HDDs and TDDs over the next 15 days (January 22 - February 6). Total demand is expected to average 131.5 bcf/d over the next 15 days (some 25.0% above 5-year average), supported (in part) by strong exports - specifically, into Mexico - but also by robust LNG sales.

Natural gas consumption is also supported by a number of non-degree-day factors such as higher nuclear outages. As of today, there were a total of 3,500 MW of nuclear power generation offline (-200 MW from Friday and +17% vs. 5-year average). Although the level of nuclear outages has been declining gradually for the past several months, it still remains above the historical norm. Other non-degree-day factors, such as coal-to-gas switching, are also starting to provide an additional boost to consumption.

While total demand remains strong and is projected to increase, total supply is mostly flat. Indeed, there has been essentially no growth in dry natural gas production for almost two months now. Total balance for the month of February, which is calculated as the difference between total supply and total demand, is currently projected to be 9.2 bcf/d tighter vs. February 2018 (see white curve on the chart below). However, the weather models are extremely volatile during this time of the year, so any long-term projections should be taken with a grain of salt.

natural gas supply demand balance Source: Bluegold Research estimates and calculations

Storage

U.S. Energy Information Administration should report a larger change in natural gas storage this week compared to the week prior. We anticipate seeing a draw of 153 bcf (2 bcf smaller than the comparable figure in the ICE's latest report for the EIW-US EIA Financial Weekly Index, 120 bcf smaller than a year ago and 32 bcf smaller vs. 5-year average for this time of the year).

There is currently a double deficit in natural gas inventories - i.e., the amount of natural gas in the underground storage is smaller compared to previous year and also compared to 5-year average. Next three EIA reports are expected to confirm the expansion of 5-year average deficit by a total of 102 bcf and the expansion of annual deficit by a total of 72 bcf.

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.