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Natural Gas Market Overview: Storage Outlook Is Still Bearish, But Weather-Neutral Balance Is Tightening

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

Total demand for natural gas is up 4.4% y-o-y to 82.70 bcf/d.

We estimate that total demand has remained above the 5-year norm for 37 consecutive weeks now.

Total supply is up 5.9% y-o-y to 99.9 bcf/d.

We currently expect the EIA to report a build of 107 bcf next week, which is 16 bcf larger than a year ago and 24 bcf larger vs. the 5-year average.

Actual supply-demand balance is still very bearish, but weather-neutral balance is tightening.

This report covers the week ending September 27, 2019.

Total Demand

We estimate that the aggregate demand for American natural gas (consumption + exports) totaled around 580 bcf for the week ending September 27 (down 2.4% w-o-w (week over week) but up 4.4% y-o-y (year over year)). The deviation from the norm remained positive but edged down from +17.00% to +15.90%. We estimate that total demand has remained above the 5-year norm for 37 consecutive weeks now.

Source: Bluegold Research estimates and calculations

This week, the weather conditions have cooled down across the Lower-48 states, but only slightly. We estimate that the number of nationwide cooling degree days (CDDs) dropped by just over 4.5% w-o-w (from 67 to 64). Total energy demand (measured in total degree-days - TDDs) was 9.3% above last year's level. However, non-degree-day factors were predominantly bearish (vs. last year).

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 were above the norm (11.5 GW per day on average) - see the chart below.
  • The average spread between natural gas and coal dropped by $0.13 per MMBtu (as the price of natural gas has retreated from previous highs, while the price of coal remained essentially unchanged). We estimate that coal-to-gas switching averaged around 7.8 bcf/d this week (up 0.2 bcf/d vs. 2018 and up 1.5 bcf/d vs. the 5-year norm).
  • Wind speeds and hydro inflows were mostly stronger y-o-y. On balance, in the week ending September 27, these two factors probably displaced some 200 MMcf/d of potential natural gas consumption in the Electric Power sector (compared to the same period in 2018).

Source: U.S. Nuclear Regulatory Commission

Overall, the net cumulative effect from non-degree-day factors this week was positive at +4.5 bcf/d of potential natural gas consumption in the Electric Power sector. However, that positive figure was still some 1.0 bcf/d below last year's results.

Total exports were down 9.0% w-o-w - primarily due to weaker LNG sales. According to Marine Traffic, U.S. LNG export terminals (Sabine Pass, Cove Point, Corpus Christi, Cameron, and Freeport) served 10 LNG vessels with a total natural gas capacity of 36 bcf (compared with 12 LNG vessels a week ago). Total flows to liquefaction averaged 6.2 bcf/d. In annual terms, total exports increased by 17.50% in the week ending September 27.

At the same time, we should say that LNG stocks (at five key export terminals) are almost full (see the chart below). If the arrival of LNG vessels slows (for whatever reason), then natural gas flows to liquefaction will drop very fast. Gulf Coast LNG futures contract is still more expensive than natural gas sold at European hubs (see the table below), even without adjusting for any additional freight/voyage costs. This situation is clearly not helping the exporters - especially those who rely more on the spot market sales as opposed to long-term contracts.

Source: Bluegold Research estimates and calculations

Source: CME, ICE, Bluegold Research estimates and calculations

Total Supply

We estimate that dry gas production has been expanding in annual terms for 121 consecutive weeks now, but the growth rate is weakening due to base effects. Currently, we project that dry gas production will average 92.97 bcf/d in September, 93.13 bcf/d in October, and 93.26 bcf/d in November. In the week ending September 27, we estimate that the aggregate supply of natural gas (production + imports) averaged around 99.9 bcf per day (virtually flat w-o-w but up 5.9% y-o-y).

Total Balance

Overall, total "non-adjusted" supply-demand balance for the week ending September 27 should be around +17.3 bcf/d, which is 2.1 bcf/d looser compared to the same week in 2018 (see the chart below). Next week (ending October 4), the balance is projected to get tighter, but it will still remain looser (vs. 2018) in absolute terms: +17.6 bcf/d in 2019 vs. +14.4 bcf/d in 2018.

Source: Bluegold Research estimates and calculations

However, weather-neutral SD balance (see the definition below) is projected to tighten slowly compared to the previous year. As of today, we estimate that the weather-neutral SD balance is around +3.45 bcf/d (vs. 2018), but we expect the balance to drop to +1.07 bcf/d by December 6.

Source: Bluegold Research estimates and calculations. Weather-Neutral SD Balance (yellow curve on the chart above) = production + imports - exports.

Storage

Currently, we expect the EIA to report a build of 107 bcf next week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +105 bcf over the next two weeks (three EIA reports). Natural gas inventories' deviation from the 5-year average is currently projected to narrow from -47 bcf today to +14 bcf for the week ending October 11.

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.