The Price For Natural Gas Drops As Short-Range Weather Models Turn Bearish

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

This Thursday, we expect EIA to report 1,179 bcf of working gas in storage for the week ending March 8.

We anticipate to see a draw of 211 bcf, which is 123 bcf larger than a year ago and 112 bcf larger vs. 5-year average.

Projected total degree-days have been trending down since February 27.

First storage build is expected in three weeks; EOS storage index rises to 1,074 bcf.

We have been bearish on the front-month contracts (April and May) since March 6, but we are currently looking for opportunities to buy the dips in summer contracts.

THE WEATHER

Last week, the number of heating degree-days (HDDs) jumped by 19.0% w-o-w and was up 39% y-o-y. We estimate that total energy demand (as measured in total degree-days – TDDs) was approximately 41% above last year’s level.

This week, the weather conditions have warmed up significantly across the U.S. A drop in heating demand was especially pronounced in the Midwest and Northeast parts of the country. We estimate that the number of nation-wide HDDs will plunge by no less than 40.0% w-o-w in the week ending March 15. However, because the number of HDDs is falling 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 March 15 should be somewhere between 100 and 105 bcf/d, which is as much as 11% above 5-year average for this time of the year. Total energy demand (measured in TDDs) should be no less than 10% below last year’s level.

Next week, the weather conditions are expected to cool down, but only slightly. The number of HDDs is currently projected to increase by 11.0% w-o-w. In annual terms, however, heating demand is still expected to remain elevated (around 4% above last year’s level), while the deviation from the norm would rise to +10.0% (see the chart below).

Total natural gas demand forecast

Source: Bluegold Research estimates and calculations

TOTAL DEMAND

On average, the latest numerical weather prediction models are showing below normal amount of HDDs and TDDs over the next 15 days (March 12-March 27). Total demand is expected to average 99.2 bcf/d over the next 15 days (some 12.6% 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 6.5 bcf/d (0.6 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 200 MMCf/d compared to previous year.

While in absolute terms, total demand remains strong, the actual trend is turning bearish. In one of our previous articles (dated February 28), we said that total demand will peak on March 7 ("Natural Gas Weekly: Total Demand To Peak On March 7"), which is exactly what happened. Indeed, projected TDDs have started to trend down as early as February 27 (see the chart below), which is why we turned bearish on the front-month contracts (April and May). Projected TDDs are now 15.4% below last year's level and 5.0% below the norm.

projected total degree days

Source: Bluegold Research estimates and calculations

STORAGE

This week, the U.S. Energy Information Administration should report a larger change in natural gas storage compared to previous week. We anticipate to see a draw of 211 bcf (6 bcf larger than the comparable figure in the ICE’s latest report for the EIW-US EIA Financial Weekly Index, but 123 bcf larger than a year ago and 112 bcf larger 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 compared to 5-year average. Next three EIA reports are expected to confirm the expansion of 5-year average deficit by a total of 130 bcf and the expansion of annual deficit by a total of 85 bcf.

Our EOS storage index has risen to 1,074 bcf (34 bcf above market expectations). Following the release of the latest extended-range ECMWF model (which was bearish, consumption-wise), we no longer expect a storage draw for the week ending April 5. Indeed, we now expect the first storage build for the week ending March 29.

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.