We have slightly reduced our short exposure earlier today, but we are not adding any new long positions (just yet). So far, the return on invested capital in May has been 4.70% in futures and 6.0% in ETNs (see the tables below).
Last week, the number of heating degree-days (HDDs) plunged 37%, as weather conditions warmed up across the country. However, heating demand was still up y-o-y. We estimate that total energy demand (as measured in total degree-days – TDDs) was approximately 11.0% above last year’s level.
This week, the weather conditions have cooled down again across Lower-48 states, but not substantially. A drop in cooling demand was especially pronounced in the Northeast and Southeast parts of the country. We estimate that the number of nationwide HDDs will rise by 14.0% w-o-w in the week ending May 17, while the number of nationwide cooling degree-days (CDDs) should edge down by about 2.0% w-o-w. We estimate that total average daily demand for natural gas for the week ending May 17 should be somewhere between 78 and 82 bcf/d, which is approximately 15.0% above 5-year average for this time of the year. Total energy demand (measured in TDDs) should be some 4.0% above last year’s level.
Next week, the weather conditions are expected to warm up substantially across the entire country. The number of HDDs is currently projected to plunge by 36.0% w-o-w for the week ending May 24. At the same time, the number of cooling degree days (CDDs) is projected to surge by as much as 73% w-o-w. Indeed, cooling demand will rise above the norm (+17%). In annual terms, total energy demand is expected to rise by 10.0%, while the deviation from the norm should increase to +12.0% (see the chart below).
Total Energy Demand
Source: Bluegold Research estimates and calculations
On average, the latest numerical weather prediction models are showing above normal amount of TDDs over the next 15 days (May 15-May 30). Total demand is expected to average 78.1 bcf/d over the next 15 days (some 16.3% 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 7.3 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 400 MMCf/d compared to the previous year. Please note that 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 (and the forward curve) is already down y-o-y.
Source: Bluegold Research estimates and calculations. The forecast is updated on a daily basis.
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). Today's early morning pipeline nominations (a proxy for production) are down (again), but yesterday's figures were revised higher. As before, the decline is mostly due to pipeline maintenance. We think that 600-900 MMcf should be back online fairly soon. As of today, production is estimated at 88.0 bcf/d, down 2.7% from a recent all-time high. Daily rate has not set a new all-time high for 47 consecutive days now. Dry gas production has averaged 89.3 bcf/d over the past 47 days. We currently expect U.S. Lower-48 dry gas production to average 90.08 bcf/d over the next three months (May-June-July), 0.16 bcf/d higher than the latest EIA estimate of 89.92 bcf/d.
This week, U.S. Energy Information Administration should report a larger change in natural gas storage compared to previous week. We anticipate to see a build of 106 (1 bcf larger than the comparable figure in the ICE’s latest report for the EIW-US EIA Financial Weekly Index, 2 bcf larger than a year ago and 17 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 59 bcf and the expansion of annual surplus by a total of 41 bcf.
Our EOS storage index has risen to 3,640 bcf (just 35 bcf below market expectations), which is a neutral 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 remains relatively low. However, should pipeline nominations continue to decline and production rate weakens, our EOS storage index could decline.
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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.