Natural Gas Market Overview: Normal Weather Leads To 'Abnormal' Consumption

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by: Bluegold Research
Summary

Total demand for natural gas is up 1.9% y-o-y to 87.3 bcf/d.

Total demand has been expanding in annual terms for 13 consecutive weeks now.

Total supply is up 6.5% y-o-y to 97.20 bcf/d.

We currently expect the EIA to report a build of 54 bcf this week.

Consumption per degree day has reached a new all-time high.

This report covers the week ending July 26, 2019.

Total Demand

We estimate that aggregate demand for American natural gas (consumption + exports) totaled around 612 bcf for the week ending July 26 (down 5.3% w-o-w but up 1.9% y-o-y). The deviation from the norm remained positive, but declined from +22.10% to +14.90%. We calculate that total natural gas demand in the U.S. has been expanding in annual terms for 13 consecutive weeks now (see the chart below).

Source: Bluegold Research estimates and calculations

Last week, the weather conditions cooled down significantly across the Lower-48 states. We estimate that the nationwide cooling degree days (CDDs) plunged by as much as 16.5% w-o-w in the week ending July 26. Total energy demand (measured in total degree-days - TDDs) was 13.0% below last year's level. Still, total demand for natural gas is growing in annual terms due to bullish non-degree day factors and stronger exports as well as because of structural factors.

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 have remained below the norm (2.7 GW per day on average) - see the chart below.
  • Despite a 7% drop in the price of Central Appalachian coal, NG/Coal spreads remain very low, allowing coal-to-gas switching to stay above 8.5 bcf/d (no less than 2.5 bcf/d above the 5-year average).
  • Wind speeds and hydro inflows were mostly stronger y-o-y. On balance, these two factors probably displaced some 400 MMcf/d of potential natural gas consumption in the Electric Power sector in the week ending July 26.

Source: U.S. Nuclear Regulatory Commission

The net cumulative effect from non-degree day factors last week was bullish, at +4.8 bcf/d of potential natural gas consumption in the Electric Power sector.

Total exports were down 13.9% w-o-w - primarily due to weaker LNG sales. According to Marine Traffic, U.S. LNG export terminals (Sabine Pass, Cove Point, Corpus Christi, and Cameron) served eight LNG vessels with a total natural gas capacity of 28 bcf. Total flows to liquefaction averaged 5.8 bcf/d.

Total Supply

We estimate that dry gas production has been expanding in annual terms for 112 consecutive weeks now, but the growth rate is weakening due to base effects. Currently, we project that dry gas production will average 90.24 bcf/d in July, 90.66 bcf/d in August, and 91.05 bcf/d in September. In the week ending July 26, we estimate that the aggregate supply of natural gas (production + imports) averaged around 97.20 bcf per day (up 1.1% w-o-w and up 6.5% y-o-y).

Total Balance

Overall, total supply-demand balance for the week ending July 26 was around 9.9 bcf/d, which was 4.3 bcf/d looser compared to the same week in 2018. However, this week (ending August 2), we expect the balance to get tighter (see the chart below).

Source: Bluegold Research estimates and calculations

Storage

Currently, we expect the EIA to report a build of 54 bcf this week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +52 bcf over the next two weeks (three EIA reports). Natural gas inventories' deviation from the 5-year average is currently projected to narrow from -151 bcf today to -125 bcf for the week ending August 9.

Despite the fact that total dry gas production is up 14% over the past 18 months, despite very low level of nuclear outages and stronger wind speeds, despite bearish LNG market and relatively cool summer, natural gas inventories are still in the "deficit" relative to 5-year average.

Indeed, days of supply indicator (which is a ratio of natural gas inventories to total demand), is up only 1.5-3.0 y-o-y. It means that natural gas storage can satisfy only 1.5-3 extra days of demand (compared to previous year). Because of structural changes and very robust coal-to-gas-switching (as a result of very low natural gas price), consumption per degree day has reached a new all-time high (see the chart below). In other words, normal weather leads to "abnormal" consumption. We expect this trend to continue especially if natural gas price remains below $2.50 per MMBtu.

Source: Bluegold Research estimates and calculations

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.