Natural Gas Market: Exceedingly Bullish Expectations Have Withered Away


This report covers the week ending September 18, 2020.

However, before I start discussing the fundamentals, I would just like to comment on the latest price action.

Yesterday’s drop in price was truly shocking, but it became possible only because of the exceedingly bullish sentiment that dominated the market for most of August. We always thought that the rally, which began on August 3 was dubious, but we did consider it to have at least some fundamental reasoning – notably rising LNG exports and shrinking annual storage “surplus.” However, it appears that there was no fundamental support for that rally at all as it was based purely on expectations. The under-supply of natural gas was never evident. Indeed, our EOiS storage index has remained above 4,000 bcf since August 10 and our EOwS storage index has consistently stayed some 150+ bcf above market expectations. See the charts below

As a general rule,

  • When our EOiS/EOwS inventory number is below market expectations (and trending down), we will try to maintain a bullish bias and we will be looking for opportunities to go long.
  • When our EOiS/EOwS inventory number is above market expectations (and trending up), we will try to maintain a bearish bias and we will be looking for opportunities to go short.

Both EOS indices have remained above market expectations for most of August.

Source: ICE, Bluegold Research estimates and calculations

Total Supply-Demand Overview

We estimate that the aggregate demand for U.S. natural gas (consumption + exports) totaled around 605 bcf (or 86.4 bcf/d) for the week ending September 18 (+1.6 bcf/d w-o-w (week over week) but -0.1 bcf/d y-o-y (year over year)). The deviation from the norm remained positive and actually increased from +8.3 bcf/d to +10.3 bcf/d.

We estimate that the aggregate supply of natural gas in the contiguous United States (production + imports) totaled around 643 bcf (or 91.9 bcf/d) for the week ending September 18 (-2.3 bcf/d w-o-w and -8.3 bcf/d y-o-y). The deviation from the norm remained positive but moderated from +7.0 bcf/d to +4.9 bcf/d.

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

September 25

  • Total supply: 92.1 bcf/d (-8.5 bcf/d y-o-y)
  • Total demand: 82.2 bcf/d (-4.0 bcf/d y-o-y)

October 2

  • Total supply: 93.0 bcf/d (-8.3 bcf/d y-o-y)
  • Total demand: 84.1 bcf/d (-4.8 bcf/d y-o-y)

Please note that these forecasts are updated daily.

Source: Bluegold Research estimates and calculations

Natgas consumption (7-day average) is projected to decline by -5.1% over the next 7 days (from 71.7 bcf/d today to 70.0 bcf/d on September 25). Total demand (consumption + exports) is currently projected to reach a seasonal bottom on September 20 and is then projected to trend higher (slowly).

Source: Bluegold Research estimates and calculations

This week, the weather conditions have cooled down substantially across the contiguous United States. We estimate that the number of nationwide cooling degree days (CDDs) plunged by 18.1% w-o-w (from 66 to 54), while the number of heating degree days remained too low to have any meaningful impact on consumption. Total “energy demand” (measured in total degree days – TDDs) should be as much as 14.9% below last year’s level, but only 1.9% below the norm. Actual TDDs are currently projected to remain mostly below the norm until October 31. However, projected TDDs have stopped declining (see the chart below), which may provide some support for the spot price and, in turn, for the futures price as well.

Source: Bluegold Research estimates and calculations

Non-Degree-Day Factors

In the week ending September 18, non-degree-day factors were “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 below the norm (4.5 GW per day on average).
  • The average spread between natural gas and coal plunged by -$0.280 per MMBtu (as the price of natural gas went down (w-o-w), while the price of coal remained relatively unchanged). We estimate that coal-to-gas switching averaged around 8.2 bcf/d (+0.4 bcf/d vs. 2019 but +1.7 bcf/d vs. the five-year norm).
  • Solar and hydro generation was stronger (vs. a year ago), but wind generation was weaker. On balance, in the week ending September 18, these three factors added some 200 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 +5.6 bcf/d, which was 0.9 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), but mostly due to base effects. At the same time, renewable generation (particularly, wind) is beginning to rise 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 64 bcf next week (a final estimate will be released on Wednesday). Overall, at this point in time, we expect storage flows to average +74 bcf over the next three weeks (four EIA reports). Annual storage “surplus” is projected to shrink by -170 bcf by October 23. Storage “surplus” vs. five-year average is projected to shrink by -69 bcf (over the same period).

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:
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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.

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