Welcome to the production is too high edition of Natural Gas Daily!
Housekeeping item first.
We expect a -168 Bcf change in the storage report for the week ended Feb. 15. A storage report of -168 Bcf would be higher than last year's -124 Bcf and -145 Bcf for the five-year average.
Storage is expected to be low, so why aren't prices going higher? Because production is still too high
EOS is forecasted to be sub 1.25 Tcf now, so why aren't natural gas prices going higher?
As we wrote in the daily yesterday, early March will show another cold blast in the demand regions boosting storage draws. But prices have failed to rally despite the bullish outlook. In fact, ECMWF-EPS 00z this morning showed higher HDDs, and prices still can't break the $2.7/MMBtu level.
Our reasoning is that lower 48 production remains too high.
Source: HFI Research
A good illustration of this is through the chart above. The demand increase has not kept up with the production increase. This chart illustrates that the natural gas market is ~3 Bcf/d oversupplied at the moment. If you take this into account, then the market will ignore the lower storage levels going into summer injection season.
From the first week of April to the first week of November, there are 31 weeks. Over the course of these 31 weeks, if the natural gas market is oversupplied by ~3 Bcf/d, then the weekly surplus build is ~21 Bcf.
The five-year average build for the 31 weeks is 2.138 Tcf. Now if the natural gas market wasn't oversupplied, we would get:
1.234 Tcf (our April storage forecast) + 2.138 Tcf = 3.372 Tcf
This would be bullish as you can see. But the issue is that we are oversupplied by ~3 Bcf/d.
21 Bcf (oversupply per week) x 31 weeks = 651 Bcf
Assuming normal weather, this would push natural gas storage to:
3.372 Tcf + 0.651 Tcf = 4.023 Tcf
Now that's not our base assumption, but you can see that there's a possibility natural gas storage could still build to ~4 Tcf by this November.
So why aren't natural gas prices going up?
Because the market thinks we have plenty of gas in storage and lower 48 production needs to decrease in order for prices to sustainably rally.
Source: HFI Research
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Disclosure: I am/we are long UGAZ. 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.