Jose the Magician was doing his act when he tells the audience, “I will disappear on the count of three!”
…and he disappeared…without a “Tres.”
This reminds us of current spring weather natural gas demands — it has disappeared without a trace.
Energy trading professionals are nearly all amateur meteorologists, spending a significant amount of their workday, even nights and weekends, looking at weather forecasts. In the first half of April, the U.S. has experienced generally mild weather and the 6-10- and 11-15-day forecasts are projecting more mild weather to come. Weather can help – a hot summer creates natural gas demand when power demand increases to meet air conditioning demand (about half our power plants use natural gas as their main fuel).
Sometimes, an April cold snap can occur near the east coast population areas, creating heating demand. Also, it isn’t uncommon for the Southwest, Texas and the deep South to get an early hot spell.
However, in 2019 neither a cold East nor a hot South has materialized. This has late summer and fall implications as we anticipate filling our storage reservoirs rapidly.
Due to a lower than normal inventory level to begin the very cold winter of 2018-2019, U.S. storage inventories are currently lagging behind the recent five-year averages as we enter the re-injection season in earnest. But we expect to get caught up very quickly.
Given the massive year-over-year increase in daily NG production, an equivalent increase in demand will be needed to prevent us from topping off the tanks before next winter begins.
The May 2019 Natural Gas Henry Hub contract traded up to $2.893 on March 19. One month later, due to the mild weather discussed above, we trade down today at $2.517. Keep in mind that 13% is a big monthly move, even in NG.
A few simple points about the overall U.S. natural gas market:
- When the gas comes out of the well, it has to go on a pipeline.
- From the pipeline, it has to get burned or stored or exported on an LNG boat.
- We aren’t super bullish LNG exports – see last week’s discussion.
- During the summer, the U.S. is a net storage injector. During the winter, our country is a net withdrawer.
- When storage inventories get near full capacity in the fall, assuming typically mild autumn weather, there can be a supply glut and nowhere to put it.
- One unique aspect of natural gas storage is that our ability to inject can be hampered even before the reservoirs are “full.”
- It’s the same physics as pumping a bicycle tire with a hand pump. The first several plunges are easy, but as the tank/tire gets full, the ability to inject becomes less and less. So, due to limited injection capacity, there can be a lot of gas looking for a home in late summer, early fall.
All this is a very wordy explanation of current pricing dynamics. Current mild spring weather reminds energy traders that we will need a hotter than normal summer to avoid a late-season gas glut. Since the odds are 1/3 each for a mild, normal or hot summer, it is statistically unlikely (one in three) that a hot weather event gives us the demand needed to stop the slide in NG prices.
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