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Natural Gas Market: Total Demand Is Projected To Reach A 'Seasonal Low' Within The Next 10 Days

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

This Thursday, we expect the EIA to report 2,429 bcf of working gas in storage for the week ending May 8.

We anticipate to see a build of 110 bcf, which is 10 bcf larger than a year ago and 25 bcf larger vs. the 5-year average.

Annual storage "surplus" is projected to expand by 10 bcf by June 12.

Projected TDDs have dropped below the norm but are projected to level off and trend higher in the next couple of days.

EIA has revised lower its U.S. dry gas production forecast by -2.59 bcf/d (on average, over the next 20 months).

The Weather

Last week

Last week (ending May 8), the number of heating degree days (HDDs) increased by 7.5% w-o-w (from 49 to 52), while the number of cooling degree days (CDDs) increased by as much as 42% (from 20 to 28). We estimate that total energy demand (as measured in total degree days, or TDDs) was 33% above last year's level and 27% above the 30-year average.

This week

This week (ending May 15), the weather is cooling down. We estimate that the number of nationwide HDDs will increase by 9.2% w-o-w (from 52 to 57), while the number of cooling degree-days (CDDs) will drop by 19% w-o-w (from 28 to 23). Total average daily consumption of natural gas (in contiguous United States) should be somewhere between 70 bcf/d and 74 bcf/d (not adjusted for COVID-19 impacts). Total energy demand (measured in TDDs) should be some 21% above last year's level and as much as 31% above the norm.

Next week

Next week (ending May 22), the weather conditions are expected to get significantly warmer. The number of HDDs is currently projected to plunge by 63% w-o-w (from 57 to 21), while the number of CDDs should jump by 66% w-o-w (from 23 to 38). However, total energy demand (measured in TDDs) should drop by 13% y-o-y, while the deviation from the norm will decrease to -1.8% (see the chart below). The number of CDDs will exceed the number of HDDs - for the first time since October 2019.

Source: Bluegold Research estimates and calculations

The latest numerical weather prediction models (Wednesday's short-range 00z runs) agree that, over the next 15 days, TDDs should remain mostly within the norm (on average) - see the chart below.

Source: NOAA, ECMWF, Bluegold Research

However, there is a minor disagreement between the models in terms of scales: the latest GFS model (06z run) is projecting 65.7 bcf/d of potential natural gas consumption (on average over the next 15 days), while the ECMWF model (00z run) is projecting 66.6 bcf/d over the same period. Please note that these consumption figures are not adjusted for the COVID-19 impacts. Projected TDDs have dropped below the norm but are projected to level off and trend higher in the next couple of days.

Source: Bluegold Research estimates and calculations

Overall, over the next 15-day period, total natural gas demand (when adjusted for probability) is expected to average 79.9 bcf/d (not adjusted for COVID-19 impacts). Total demand is projected to reach a "seasonal low" within the next 10 days.

Source: Bluegold Research estimates and calculations

Supply And Storage

The COVID-19 pandemic has caused significant changes in energy fuel supply and demand patterns. The impact of COVID-19 on natural gas demand is heavily influenced by the scale and duration of the lockdown.

Six weeks ago, we introduced statistical adjustments in our storage forecasting models, which resulted in a long-term bearish bias. Most recently, however, we have slightly altered our COVID-19 assumptions (added a bit of demand on the back-end + lowered our production estimates). We will continue to monitor the lockdown situation closely and our storage level outlook will be updated accordingly. Currently, we estimate that the percentage of the U.S. population under lockdown has decreased to 71% (from the peak of 96% observed in April). EOS storage index currently stands at 3,942 bcf.

However, once the pandemic situation normalizes and our COVID-19 storage adjustments are removed, our EOS storage is likely to drop. Furthermore, we are constantly monitoring the latest production trends and we are adjusting our storage forecast accordingly. In general, natural gas production is projected to decline for two key reasons:

  1. Productivity of new wells has plateaued, while the inventory of old wells is now growing faster than the inventory of new wells.
  2. The collapse in oil prices is prompting companies to deepen spending cuts and reduce future output.

In its latest STEO report, EIA has revised lower its U.S. dry gas production forecast by -2.59 bcf/d (on average). Daily production rate is projected to decline until Mar 2021. Overall, EIA projects that dry gas production will average just 86.05 bcf/d over the next 20 months (May 2020 - December 2021).

Source: EIA, Bluegold Research estimates and calculations

So far, dry gas production continues to trend down (see the chart below).

Source: Bluegold Research estimates and calculations

Storage Report

This week, the U.S. Energy Information Administration should report a similar change in natural gas storage compared to the previous week. We anticipate to see an injection of 110 bcf (2 bcf larger than the comparable figure in the ICE's latest report for the EIW-US EIA Financial Weekly Index, 10 bcf larger than a year ago and 25 bcf larger vs. the 5-year average for this time of the year). Annual storage "surplus" is projected to expand by 10 bcf by June 12.

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.