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By the skin of your teeth – Natgas could dodge storage capacity issues

Contributor Kyle Cooper breaks down the most significant developments in last week’s natural gas market. 

Price Action:   Last week prices were again strongest in the first couple of days and fell as inventories continued to rise. Prices slipped 3.7 cents (1.7%) to $2.089 on a 13.5 cent range. The week’s storage injection again indicated that the bullish temperature adjusted supply/demand balance is relaxing.  For background on temperature adjusted supply/demand, see The upside-down natural gas market – Spring 2012

Price Outlook: While the most recent two weekly storage injections were less bullish on a temperature adjusted supply/demand basis, data in early April is again considered quite bullish. The implications of a very bullish temperature adjusted supply/demand balance are quite significant. If the perceived supply/demand balance remains in place, storage capacity issues should not present a problem in late October or November.   Note in the graph below, the inventory level for this year (red dots) is projected to begin closing on the level in prior years.  This is primarily due to the fact that the power sector is burning about 7 bcf/d more than historical norms – mostly coal-to-gas switching, partially offset by other demand factors and then rising supply.  Net-net this leaves the total market about 5 bcf/d bullish on a relative basis.  So as long as this continues, the natural gas market will avoid disruptive storage issues ‘by the skin of its teeth’. 

However, with a 900 BCF storage surplus, there is little room for any bearish shift in overall fundamental factors. A mild summer and subsequent reduction in cooling demand, for instance, would place storage capacity under pressure. At the same time, natural gas has little room to lose market share back to coal in the power generation sector. (As noted yesterday in The Wall).  Storage issues may also arise if natural gas electricity generation demand begins to falter for any reason.

CFTC data indicated a move to a slight net long position for the first time since August 2011. CME futures open interest remains over 1.25 million contracts. Total open interest across the complex fell slightly to a still very robust 5.93 million contracts as of April 3, 2012.

Weekly Storage: US working gas storage rose 42 BCF for the week ending March 30. Current inventory levels of 2,479 BCF now rise 900 BCF (57.0%) above last year while surpassing the 5 year average by 935 BCF (60.6%). This staggering surplus overhang must be reduced. Canadian storage levels are also considered bearish with inventories still at 69% of capacity.

Supply Trends: Over the past week, total supply increased 0.3 BCF/D to 67.9 BCF/D as both Canadian and LNG imports rose. US production and Mexican exports were unchanged. The US Baker Hughes total rig count was unchanged as a rise in oil was exactly offset by another drop in natural gas. Canadian rigs followed the seasonal trend lower and thus the total North American rig count fell 69 to 2,166. However, the fall was less than last year and the total North American rig count now stands 193 higher than last year. The higher efficiency horizontal rig count fell 15 to 1,165, 156 higher year-on-year.

Demand Trends: Total demand increased 4.1 BCF/D to 63.2 BCF/D as a rise in the residential and commercial (R&C) and Industrial sectors offset a decline in the power generation sector. Electricity demand rose 96 gigawatt-hrs to 68,650 which is 4,054 (5.6%) below last year and 1,319 (1.9%) behind the 5 year average. Above normal temperatures will not lift total demand until late May or even June on a national basis.

Other Factors: Disappointing jobs data may prove to be a drag on consumer optimism and equity markets this week.

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Comments

Great analysis Kyle!   So, what's the best trade to put on right now?