February 14, 2019 Natural Gas Storage Report: Tighter Balance And Growing Storage Deficit

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

This Thursday, we expect EIA to report 1,875 bcf of working gas in storage for the week ending February 8.

We anticipate to see a draw of 85 bcf, which is 98 bcf smaller than a year ago and 75 bcf smaller vs. 5-year average.

Dry gas production has failed to set a new all-time high for 74 consecutive days now.

Thanks to lower natural gas prices, coal-to-gas switching is back above the norm.

THE WEATHER

Last week, the number of heating degree-days (HDDs) plunged by 35.0% w-o-w and by almost 20% y-o-y. We estimate that total energy demand (as measured in total degree-days – TDDs) was approximately 18% below last year’s level.

This week, the weather conditions have cooled down sharply across the country. An increase in heating demand was especially pronounced in Central and Western 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 February 15. Because HDDs are rising from a relatively high base, the absolute consumption figures remain strong. Indeed, we estimate that total average daily demand for natural gas for the week ending February 15 should be somewhere between 120 and 125 bcf/d, which is as much as 15% above 5-year average for this time of the year. Total energy demand (measured in TDDs) should be no less than 12% 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 17.0% w-o-w. In annual terms, the rise in heating demand will be even more violent (+55.0% y-o-y), while the deviation from the norm would rise to +28.0% (see the chart below), which will be the most significant weekly deviation in HDDs since November 2018.

Total Energy Demand

Total natural gas demand 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 (February 12-February 27). Total demand is expected to average 126.1 bcf/d over the next 15 days (some 28.0% 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 coal-to-gas-switching. We estimate that at the current spread between natural gas and coal, coal-to-gas-switching must be averaging approximately 7.0 bcf/d (1.7 bcf/d above the norm). At the same time, other non-degree-day factors, such as rising nuclear outages and relatively weak hydro inflows are spurring extra consumption in the Electric Power sector by no less than 500 MMCf/d compared to previous year.

While total demand remains strong, total supply is mostly flat. Indeed, there has been essentially no growth in dry natural gas production for almost three months now. Total monthly natural gas balance, which is calculated as the difference between total supply and total demand, is currently projected to be 8.1 bcf/d tighter vs. February 2018 and 3.8 bcf/d tighter vs. March 2018 (see the bright blue curve on the chart below). However, the weather models are extremely volatile during this time of the year so all the long-term projections should be taken with a grain of salt.

Total Natural Gas Balance

Total natural gas supply demand balance

STORAGE

U.S. Energy Information Administration should report a smaller change in natural gas storage this week compared to the week prior. We anticipate to see a draw of 85 bcf (5 bcf larger than the comparable figure in the ICE’s latest report for the EIW-US EIA Financial Weekly Index, but 98 bcf smaller than a year ago and 75 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 46 bcf and the expansion of annual deficit by a total of 56 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.