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Natural Gas: Prices Will Rise Even If The Weather Forecast Remains Unchanged

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

Currently, we expect the EIA to report a draw of 30 bcf next week (a final estimate will be released on Wednesday).

Annual storage surplus is projected to shrink by 84 bcf by December 25.

There seems to be a bullish divergence between the value of the forward curve and the latest natural gas storage forecast (see the charts below).

2.520 looks like a strong support level (for now), and it is unlikely to be broken in case the weather forecast remains flat.

However, if the weather turns more bearish and production remains flat, next support will be at 2.500-2.497, 2.450-2.446, and 2.401.

This report covers the week ending November 20, 2020.

Total Supply-Demand Overview

We estimate that the aggregate demand for U.S. natural gas (consumption + exports) totaled around 718 bcf (or 102.5 bcf/d) for the week ending November 20 (up +7.3 bcf/d w-o-w (week over week), but down -4.0 bcf/d y-o-y (year over year)). The deviation from the norm remain positive and has actually increased significantly to +11.5 bcf/d (from a mere +1.1 bcf/d a week earlier).

We estimate that the aggregate supply of natural gas in the contiguous United States (production + imports) totaled around 695 bcf (or 99.3 bcf/d) for the week ending November 20 (up +3.9 bcf/d w-o-w but down -4.0 bcf/d y-o-y). The deviation from the norm remained positive and increased from +6.5 bcf/d to +10.3 bcf/d.

Here's our latest forecast for the next two weeks:

November 27

  • Total supply: 98.8 bcf/d (-4.6 bcf/d y-o-y)
  • Total demand: 101.0 bcf/d (-5.3 bcf/d y-o-y)

December 4

  • Total supply: 97.2 bcf/d (-7.4 bcf/d y-o-y)
  • Total demand: 112.4 bcf/d (-3.6 bcf/d y-o-y)

Notice that the annual drop in total natural gas supply is currently projected to be larger than the annual drop in total demand - particularly, for the week ending December 4. Therefore, supply-demand balance is projected to be tighter over the next two weeks (vs 2019).

Please note that these forecasts are updated daily.

Source: Bluegold Research estimates and calculations

Natural gas consumption (seven-day average) is projected to edge down by -0.7% over the next 7 days (from 85.1 bcf/d today to 84.5 bcf/d on November 27). LNG feedgas flows remain new all-time high - 9.7 bcf/d. We currently expect total demand (consumption + exports) in the contiguous United States to average 122.34 bcf/d over the next two months (December-January), down +2.73 bcf/d y-o-y.

Source: Bluegold Research estimates and calculations

US LNG Exports

Source: Bluegold Research estimates and calculations

At the same time, we should remember that the weather forecast can change very quickly and at any moment, so we need to be very careful during this time of the year. Natural gas is primarily a winter commodity. The "cold season" is the time of high volatility in natural gas markets. Changes in heating-degree days (HDDs) have a disproportionately stronger impact on consumption than changes in cooling-degree days (CDDs).

This week, the weather conditions have cooled down substantially in the contiguous United States. We estimate that the number of nationwide HDDs has surged by 45.8% w-o-w (from 73 to 107). However, total "energy demand" (measured in total degree days - TDDs) should be some 14% below last year's level and 12% below the norm.

In absolute terms, projected short-range TDDs are below last year’s level (-16.0%) as well as below the norm (-18.6%). Actual TDDs are currently projected to trend higher but remain mostly below the norm until at least Dec. 3.

Source: Bluegold Research estimates and calculations

Storage

Currently, we expect the EIA to report a draw of 30 bcf next week (a final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average -58 bcf over the next three weeks (four EIA reports). Annual storage surplus is projected to shrink by 84 bcf by December 25. Storage surplus vs. five-year average is projected to shrink by 57 bcf over the same period (from +238 bcf to +181 bcf).

There seems to be a bullish divergence between the value of the forward curve and the latest natural gas storage forecast (see the charts below). Weather-neutral SD balance is still very tight vs a year ago, and if this winter turns out to be colder than normal, natural gas prices will most certainly rally above $3.500 per MMBtu. 2.520 looks like a strong support level (for now), and it is unlikely to be broken in case the weather forecast remains flat. However, if the weather turns more bearish and production remains flat, next support will be at 2.500-2.497, 2.450-2.446 and 2.401.

Source: EIA, Bluegold Research estimates and calculations

Disclosure: I am/we are long NG1:COM. 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.