Natural Gas Market: The Weather Forecast Is Bearish, But Also Less Relevant

Summary

• This Thursday, we expect the EIA to report 2,088 bcf of working gas in storage for the week ending February 28.
• We anticipate to see a draw of 112 bcf, which is 40 bcf smaller than a year ago but 6 bcf larger vs. the 5-year average.
• On average, short-range weather models are projecting below normal amount of total degree-days over the next 15 days.
• However, the weather factor is becoming less and less relevant as we move further into the shoulder season.
• The weather has "removed" an estimated 1,200 bcf in potential natural gas consumption (over November-March).
• This idea was discussed in more depth with members of my private investing community, Natural Gas Fundamentals. Get started today »

The Weather

Last week

Last week (ending February 28), the number of heating degree days (HDDs) declined by 13.4% w-o-w (from 177 to 153). We estimate that total energy demand (as measured in total degree days, or TDDs) was 15.9% below last year's level and 4.8% below the 30-year norm. Cooling demand remained too weak to have a meaningful impact on natural gas consumption.

This week

This week (ending March 6), the weather conditions are getting significantly warmer. We estimate that the number of nationwide HDDs will plunge by 21.1% w-o-w (from 153 to 121). Total average daily demand for natural gas should be somewhere between 105 bcf/d and 110 bcf/d, which is only 0.9% above the 5-year average for this time of the year. Total energy demand (measured in TDDs) should be as much as 42.5% below last year's level and 18.0% below the 30-year norm.

Next week

Next week (ending March 13), the weather conditions are expected to get even warmer. The number of HDDs is currently projected to decline by another 8.4% w-o-w (from 121 to 111). In annual terms, total energy demand (measured in TDDs) is currently expected to drop by 12.6%. The deviation from the norm should remain negative at approximately -18.9%.

Total Energy Demand

Source: Bluegold Research estimates and calculations

This winter season, the weather has been totally violent (for the bulls). Make no mistake - there is only one major reason why natural gas price is currently so low - it is the weather. Since November 2019, numerical weather prediction systems have shown significantly more "bearish changes" than "bullish changes" (see the chart below). The cumulative amount of changes in the number of projected HDDs was -514 (or at least -1,200 bcf in total potential natural gas consumption over November-March). Moreover, the largest bearish changes were for week 1, week 2 and week 3, which are normally covered by the standard short-range weather models.

Source: ECMWF, Bluegold Research estimates and calculations

The bulls, however, may find comfort in knowing that while the weather remains the key driver of natural gas consumption, its relative importance is slowly declining due to seasonal factors. April contract and subsequent summer contracts will be less weather-driven and more "price-driven" or "economics-driven." Finally, the traders will be able to switch their attention from the chaotic weather models to something more orderly, such as fuel-switching economics.

The share of the Electric Power (EP) sector in the overall consumption mix will rise above 25% in March, above 30% in April and above 50% in summer. Natural gas consumption in the EP sector is less susceptible to changes in the short-range weather models.

Total Supply-Demand Balance

Overall, the latest numerical weather prediction models (Wednesday's short-range 00z runs) agree that over the next 15 days, TDDs should remain below the norm.

Source: NOAA, ECMWF, Bluegold Research

However, there is a minor disagreement in terms of scales: the latest GFS model (06z run) is projecting 88.1 bcf/d of potential natural gas consumption (on average over the next 15 days), while the ECMWF model (00z run) is projecting just 87.5 bcf/d.

Source: Bluegold Research estimates and calculations

Overall, over the next 15-day period, total demand (when adjusted for probability) is expected to average 103.2 bcf/d (some 9.0% above the 5-year average), supported (in part) by LNG sales and pipeline exports into Mexico.

Indeed, as of this Sunday, ​LNG storage (at key export terminals) was just 47% full (see the chart below) - so, LNG does get exported (despite warmer weather throughout the world and weaker demand due to the coronavirus) and there is still space for more dry gas to be liquefied.

Source: Bluegold Research estimates and calculations

Non-degree-day factors have a bullish impact on natural gas consumption in both relative and absolute terms. We estimate that, at the current spread between natural gas and coal, coal-to-gas switching must be averaging approximately 8.4 bcf/d (1.7 bcf/d above last year's level and 1.3 bcf/d above the 5-year average). Additionally, nuclear outages are spurring some extra consumption in the Electric Power sector. Indeed, the bullish impact from seasonal maintenance at nuclear power plants is likely to increase in the nearest future as nuclear outages are rising and should continue to rise until mid-April (at least).

However, stronger wind, hydro, and solar generation are having a negative impact on the potential power burn. On balance, however, we estimate that non-degree-day factors are currently having a bullish impact on potential natural gas consumption (compared to the same period in 2019). We estimate the net impact to be around +3.9 bcf/d (+1.0 bcf/d vs. 2019).

Overall, in the week ending March 6, we currently project that total unadjusted supply-demand balance in the U.S. will be looser (vs. the same week in 2019) by +25.1 bcf/d (as per EIA methodology). In the week ending March 13, we expect the balance to tighten up to +2.8 bcf/d (see the table below).

Source: Bluegold Research estimates and calculations based on EIA methodology (Lower-48 states + Alaska). The figures in the table above are weekly averages measured in million cubic feet per day (MMcf/d). Deviations from the 5-year norm are measured in percentages. Deviations from the previous year are measured in MMcf/d. Deviations are colored in accordance with their notional effect on the price. For example, higher consumption should have a positive effect (green color), whereas higher production has a negative effect (red color). Total Balance represents the net result of the interaction between total supply and total demand. Total Balance = total supply minus total demand. Total Balance does not equal storage flows. *Total Balance deviation vs. 5-year average = total supply deviation minus total demand deviation.

Storage Report

This week, the U.S. Energy Information Administration should report a smaller change in natural gas storage compared to the previous week. We anticipate to see a draw of 112 bcf (2 bcf larger than the comparable figure in the ICE's latest report for the EIW-US EIA Financial Weekly Index, 40 bcf smaller than a year ago and 6 bcf larger vs. the 5-year average for this time of the year). Annual storage "surplus" is projected to expand by 267 bcf (in total) over the next 3 weeks (4 EIA reports): from +637 bcf today to +904 bcf in the week ending March 20.

Analyst’s 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.