Natural Gas Fundamentals: Consumption Is Increasing, While Production Remains Flat

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by: Bluegold Research
Summary

Total demand for American natural gas is up 1.5% w-o-w to 81.70 bcf per day.

Total natural gas supply is down 0.80% w-o-w to 97.10 bcf per day.

Projected cooling-degree days rise above the norm.

Non-degree-day factors spur extra consumption in the Electric Power sector.

Still, annual storage surplus is growing, but at a very slow pace.

This report covers the week ending June 7, 2019.

Total Demand

We estimate that aggregate demand for American natural gas (consumption + exports) totaled around 572 bcf for the week ending June 7 (up 1.5% w-o-w and up 10.4% y-o-y). The deviation from the norm remained positive but increased only slightly from +21.0% to +21.2% (see the chart below).

Source: Bluegold Research Estimates and Calculations

Last week, the weather conditions have warmed up slightly across the Lower-48 states. We estimate that the number of nationwide cooling degree-days (CDDs) increased by around 8.7% w-o-w. However, total energy demand (measured in total degree-days) was below last year's level by around 5.6%.

Non-degree day factors were mixed. The most important four non-degree-day factors that we are looking at are: nuclear outages, the spread between natural gas and coal (coal-to-gas switching), wind speeds, and hydro inflows.

  • Nuclear outages rose above the norm (some 55.0 gigawatts of nuclear power was offline last week - as much as 23% above the historical mean).
  • NG/Coal spreads remained relatively low, allowing coal-to-gas switching to stay above 7.0 bcf/d (no less than 1.6 bcf/d above 5-year average).
  • Wind speeds and hydro inflows were mostly weaker y-o-y, adding extra 300 MMcf/d of potential natural gas consumption in the Electric Power sector.

Source: U.S. Nuclear Regulatory Commission

The net cumulative y-o-y effect from non-degree day factors was bullish, at +1,500 MMcf/d of potential natural gas consumption.

Total exports were up 38.0% y-o-y - primarily due to robust LNG sales. According to Marine Traffic, U.S. LNG export terminals (Sabine Pass, Cove Point, and Corpus Christi) served 10 LNG vessels with a total natural gas capacity of 35 bcf, very close to an all-time high. Total flows to liquefaction averaged 5.3 bcf/d.

Total Supply

We estimate that dry gas production has been expanding in annual terms for 105 consecutive weeks now, but the growth rate is weakening due to base effects. Currently, we project that dry gas production will average 89.87 bcf/d in June, 89.94 bcf/d in July, and 89.94 bcf/d in August. In the week ending June 7, the aggregate supply of natural gas (production + imports) averaged around 97.10 bcf per day (down 0.80% w-o-w but up 9.70% y-o-y).

Total Balance

Overall, the total unadjusted supply/demand balance should be positive at around +15.40 bcf/d.

In the simplest of terms and with all other things being equal, this kind of balance is neutral for natural gas prices since it is only slightly above last year's level and mostly within the historical norm (see the chart below). However, the market is forward-looking, and this week's data is, to some extent, irrelevant for traders. The price is often a function of a 2-week weather forecast and end-of-season storage expectations + short-term changes in non-degree day factors, such as nuclear outages, wind speeds, and NG/coal spreads. In the week ending June 14, we expect the natural gas balance to be looser (relative to 2018), by around 5.50 bcf/d.

Source: Bluegold Research estimates and calculations; Note: total supply-demand balance does not equal storage flows.

What about weather-neutral balance? Weather-neutral SD balance = production + imports - exports. So far, it remains above last year's level (+5.24 bcf/d) but is projected to tighten slowly. However, by August 16, 2019, it is still projected to remain looser (relative to 2018) by around +2.36 bcf/d - see the chart below.

Source: Bluegold Research estimates and calculations; Note: LNG exports estimates are based on vessels tracking system (not on the liquefaction flows) and therefore are likely to be revised higher.

Storage

Last week, the EIA reported a build of 119 bcf. Total storage now stands at 1,986 bcf, which is 240 bcf (or 10.78%) below the 5-year average for this time of the year. Currently, we expect the EIA to report a build of 100 bcf next week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +97 bcf over the next two weeks (three EIA reports). Natural gas inventories deviation from 5-year average is currently projected to narrow from -240 bcf (or -10.78%) today to -195 bcf (or -7.89%) for the week ending June 21.

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.