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Natural Gas Market Overview: Dry Gas Production Has Reached A Major Long-Term Peak

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Includes: BOIL, DGAZ, FCG, GASX, GAZB, KOLD, MLPG, UGAZ, UNG, UNL
by: Bluegold Research
Bluegold Research
Commodities, medium-term horizon, trader
Summary

Total demand for natural gas is up 13.0% y-o-y to 94.9 bcf/d.

Total supply is up 7.2% y-o-y to 102.4 bcf/d.

We currently expect the EIA to report a build of 38 bcf next week, which is 25 bcf smaller than a year ago and 19 bcf smaller vs. 5-year average.

We expect dry gas production to peak this year and remain essentially flat for the whole of 2020.

Natural gas storage "surplus" relative to the 5-year average will briefly turn into "deficit".

This report covers the week ending November 1, 2019.

Total Demand

We estimate that the aggregate demand for American natural gas (consumption + exports) totaled around 665 bcf for the week ending November 1 (up 10.5% w-o-w (week over week) and up 13.0% y-o-y (year over year)). The deviation from the norm remained positive and actually increased from +17.2% to +27.2%. We estimate that total demand has remained above the 5-year norm for 42 consecutive weeks now.

Source: Bluegold Research estimates and calculations

This week, the weather conditions have cooled down significantly across the Lower-48 states. We estimate that the number of nationwide cooling degree-days (CDDs) dropped by 47.0% w-o-w (from 18 to 9), while the number of heating degree-days (HDDs) jumped by 64% (from 61 to 100). Total energy demand (measured in total degree-days - TDDs) was approximately 32.3% above last year's level and around 22.6% above the norm.

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 mostly below the norm (16.0 GW per day on average) - see the chart below.
  • The average spread between natural gas and coal increased by +$0.248 per MMBtu (as the price of natural gas surged, while the price of coal remained essentially unchanged). We estimate that coal-to-gas switching averaged around 6.4 bcf/d this week (up 0.2 bcf/d vs. 2018 and up 0.3 bcf/d vs. the 5-year norm).
  • Wind speeds were mostly stronger y-o-y, while hydro inflows were neutral. On balance, in the week ending November 1, these two factors probably displaced some 600 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 should be positive at around +3.8 bcf/d of potential natural gas consumption in the Electric Power sector. However, that positive figure is some 0.9 bcf/d below last year's results.

Total exports were down 4.4% w-o-w - primarily due to weaker LNG sales (please note that our LNG export estimates are based on the vessels tracking system, not on the liquefaction flows). 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 35 bcf. Total LNG feed gas flows averaged 7.4 bcf/d. In annual terms, total exports increased by 11.0% in the week ending November 1.

Currently, we expect natural gas exports to average 12.84 bcf/d in November, 13.53 bcf/d in December, and 14.14 bcf/d in January (see the chart below). The share of LNG exports should reach 50% by 2020.

Source: Bluegold Research estimates and calculations

Total Supply

We estimate that dry gas production has been expanding in annual terms for 126 consecutive weeks now, but the growth rate is weakening due to base effects. Currently, we project that dry gas production will average 94.7 bcf/d in November, 93.2 bcf/d in December, and 92.5 bcf/d in January. In the week ending November 1, we estimate that the aggregate supply of natural gas (production + imports) averaged around 102.4 bcf per day (up 0.4% w-o-w and up 7.2% y-o-y).

Our research shows that U.S. dry gas production is at a major long-term peak. Indeed, we expect dry gas production to remain essentially flat for the whole of 2020. Production may even decline slightly (in annual terms) in spring/summer of 2020. Near-term shale production is already declining because output declines at legacy wells outrun new production coming online, as fewer new (and productive) wells are being drilled compared to last year.

Total Balance

Overall, total "non-adjusted" supply-demand balance for the week ending November 1 should be around +7.56 bcf/d, which is approximately 4.1 bcf/d tighter compared to the same week in 2018 (see the chart below). Next week (ending November 8), the balance is projected to get even tighter. Annual difference should be negative, at around -4.3 bcf/d (i.e., +0.18 bcf/d in 2019 vs. +4.49 bcf/d in 2018) - see the chart below.

Source: Bluegold Research estimates and calculations

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 +5.63 bcf/d (vs. 2018), but we expect the balance to drop to -0.42 bcf/d (vs 2019) by January 10, 2020.

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 38 bcf next week (final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average -6 bcf over the next two weeks (three EIA reports). Natural gas storage "surplus" relative to the 5-year average is currently projected to narrow and briefly turn into "deficit" from +52 bcf today to -20 bcf for the week ending November 15.

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.