We have slightly reduced our long exposure earlier today, but we remain net-long (in June and July contracts) and we will continue to buy the dips at lower prices. However, we do not expect to see any strong bearish or bullish trends this injection season. We continue to emancipate a sideways market. Below is the list of executed trades.
Last week, the number of heating degree-days (HDDs) surged 40%, as weather conditions cooled down across the country. Heating demand was up as much as 73.0% y-o-y. We estimate that total energy demand (as measured in total degree-days – TDDs) was approximately 37.0% above last year’s level.
This week, the weather conditions have warmed up substantially across Lower-48 states. A drop in heating demand was especially pronounced in the Northeast and Central parts of the country. We estimate that the number of nationwide HDDs will plunge by 37.0% w-o-w in the week ending May 10, while the number of nationwide cooling degree-days (CDDs) should edge up by only around 2.0% w-o-w. We estimate that total average daily demand for natural gas for the week ending May 10 should be somewhere between 79 and 80 bcf/d, which is 15.0% above 5-year average for this time of the year. Equally, total energy demand (measured in TDDs) should be some 15.0% above last year’s level.
Next week, the weather conditions are expected to get colder (again). The number of HDDs is currently projected to increase by 10.0% w-o-w for the week ending May 17. At the same time, the number of cooling degree days (CDDs) is projected to drop by as much as 17% w-o-w. Indeed, heating demand will rise above the norm. In annual terms, however, total energy demand is still expected to remain subdued (around 1.0% below last year’s level), while the deviation from the norm would moderate to +1.1% (see the chart below).
Total Energy Demand
Source: Bluegold Research estimates and calculations
On average, the latest numerical weather prediction models are showing just about normal amount of TDDs over the next 15 days (May 8-May 23). Total demand is expected to average 78.7 bcf/d over the next 15 days (some 15.5% 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 7.4 bcf/d (1.7 bcf/d above the norm). At the same time, other non-degree-day factors, such as declining nuclear outages, relatively weak hydro inflows and milder wind speeds are spurring extra consumption in the Electric Power sector by no less than 200 MMCf/d compared to the previous year. We should note that we have been observing less favorable wind patterns in key states such as Texas and therefore wind generation over the past five days has been weaker (compared to 2018), meaning that natural gas-fired plants had to pick up the slack. Indeed, because the share of renewables (particularly, wind and solar) in the overall energy mix is growing, the traditional competition between natural gas and coal may soon become a thing of the past. Observing wind speeds and calculating solar output may become just as important as studying the amount of cooling-degree days.
While in absolute terms, total demand remains strong, it is still projected to remain mostly below total supply, resulting in looser SD balance compared to 2018 (see the table below). Notice that while SD balance looks bearish (vs. 2018), the current price is already down y-o-y and forward curve appears undervalued relative to projected fundamentals for week 3, week 4 and week 5.
Source: Bluegold Research estimates and calculations
Dry gas production has been essentially flat year-to-date. U.S. Lower-48 dry gas production reached an all-time high on Mar. 29 - 90.4 bcf/d (+1,100 MMcf/d from the previous all-time high, reached on Nov. 30, 2018). As of today, production is estimated at 87.5 bcf/d, down 3.2% from a recent all-time high. Daily rate has not set a new all-time high for 40 consecutive days now. We currently expect U.S. Lower-48 dry gas production to average 89.94 bcf/d over the next three months (May-June-July), 0.02 bcf/d higher than the latest EIA estimate of 89.92 bcf/d for the same period.
This week, U.S. Energy Information Administration should report a smaller change in natural gas storage compared to previous week. We anticipate to see a build of 85 bcf (1 bcf smaller than the comparable figure in the ICE’s latest report for the EIW-US EIA Financial Weekly Index, but 13 bcf larger vs. 5-year average for this time of the year).
Next three EIA reports are expected to confirm the contraction of 5-year average deficit by a total of 54 bcf and the expansion of annual surplus by a total of 21 bcf.
Our EOS storage index has dropped to 3,580 bcf (115 bcf below market expectations), which is a bullish signal (with all other things being equal). Favorable fuel switching economics and strong projected powerburn are some of the key reasons why EOS storage index is now below market expectations. However, should pipeline nominations continue to decline and production rate weaken, our EOS storage index could decline further.
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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.