Natural Gas Market: Our EOS Storage Indices Are Below Market Expectations

Natural Gas Market: Our EOS Storage Indices Are Below Market Expectations

This report covers the week ending October 9, 2020.

Total Supply-Demand Overview

We estimate that the aggregate demand for U.S. natural gas (consumption + exports) totaled around 607 bcf (or 86.7 bcf/d) for the week ending October 9 (+1.9 bcf/d w-o-w (week over week) and +1.6 bcf/d y-o-y (year over year)). The deviation from the norm remained positive and actually increased from +8.9 bcf/d to +13.0 bcf/d.

We estimate that the aggregate supply of natural gas in the contiguous United States (production + imports) totaled around 647 bcf (or 92.4 bcf/d) for the week ending October 9 (-0.9 bcf/d w-o-w and -8.5 bcf/d y-o-y). The deviation from the norm remained positive but moderated slightly from +5.7 bcf/d to +5.0 bcf/d.

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

October 16

  • Total supply: 92.1 bcf/d (-9.9 bcf/d y-o-y)
  • Total demand: 86.5 bcf/d (-1.7 bcf/d y-o-y)

October 23

  • Total supply: 93.3 bcf/d (-9.3 bcf/d y-o-y)
  • Total demand: 91.2 bcf/d (+2.0 bcf/d y-o-y)

Thus, total balance is projected to remain tighter (vs. a year ago), ensuring that the annual storage “surplus” will continue to shrink.

Please note that these forecasts are updated daily.

Source: Bluegold Research estimates and calculations

Natural gas consumption (seven-day average) is projected to decrease by -0.3% over the next seven days (from 71.5 bcf/d today to 71.3 bcf/d on October 16). Overall, daily natural gas consumption is projected to reach a major “seasonal low” on October 10 and is then projected to trend higher (slowly), but is also currently projected to remain mostly below last year’s level (see the chart below).

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).

Source: Bluegold Research estimates and calculations

This week, the weather conditions have cooled down noticeably in the contiguous United States. We estimate that the number of nationwide CDDs dropped by 18.0% w-o-w (from 35 to 29), while the number of HDDs increased by 18.5% (from 26 to 31). Total “energy demand” (measured in total degree days – TDDs) should be 10.3% below last year’s level and 8.6% below the norm. Actual TDDs are currently projected to rise above the norm on October 16. Projected TDDs are trending upward. However, there still appears to be a bearish divergence between the forward curve (December contract) and the number of projected TDDs (for November) – see the chart below.

Source: Bluegold Research estimates and calculations

Non-Degree-Day Factors

In the week ending October 9, non-degree-day factors were “slightly bullish” (vs. last year). The most important five 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, solar radiation, and hydro inflows.

  • Nuclear outages were above the norm (16.1 GW per day on average).
  • The average spread between natural gas and coal widened by +$0.219 per MMBtu (as the price of natural gas went up (w-o-w), while the price of coal remained relatively unchanged). We estimate that coal-to-gas switching averaged around 8.1 bcf/d (-0.1 bcf/d vs. 2019 but +1.4 bcf/d vs. the five-year norm).
  • Solar generation was stronger (vs. a year ago), but hydro and wind generation were weaker. On balance, in the week ending October 9, these three factors added some 500 MMcf/d of extra natural gas consumption in the Electric Power sector (compared to the same period in 2019).

Source: U.S. Nuclear Regulatory Commission

Overall, the net cumulative effect from four non-degree-day factors was positive at around +5.7 bcf/d, which was 0.3 bcf/d above last year’s level.

Source: Bluegold Research estimates and calculations

Next week, however, it appears that the net impact from non-degree-day factors is likely to be “bearish” (vs. 2019) – particularly, due to stronger wind generation. Renewable generation (particularly, wind) is rising due to seasonal factors, while nuclear generation is getting weaker (due to scheduled maintenance).

Storage

Currently, we expect the EIA to report a build of 53 bcf next week (a final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +36 bcf over the next three weeks (four EIA reports). Annual storage “surplus” is projected to shrink by -126 bcf by November 13. Storage “surplus” vs. five-year average is projected to shrink by -153 bcf (over the same period). All our EOS storage indices are now below market expectations.

Source: EIA, Bluegold Research estimates and calculations

Thank you for reading this article. We also write daily and weekly reports, covering key variables in U.S. natural gas market (supply, demand, storage, prices and more). We provide the following to subscribers:
We are offering a two-week free trial, and we will soon begin to cover global LNG market. Come and join us.

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.

Source Article

Comments are closed.