The upside-down natural gas market – Spring 2012

Subtitle: Small should have been smaller, which might make bearish turn out bullish

This posting looks at developments in the natural gas market over the past few days and the implications for prices going forward.  We’ll examine seven key topics – (1) last’s weeks price action, (2) the current price outlook, (3) current storage, (4) the storage outlook, (5) supply trends, (6) demand trends, and (7) other factors.  [Contributor Kyle Cooper]

1. Price Action:             Although prices began last week little changed, weakness ensued and the prompt May contract ended lower by 24.7 cents (10.4%) at $2.126 on a 31.8 cent range.  Futures prices were only moderately higher on Monday.  Although temperatures have been well above normal all winter, temperatures are now truly moderating with the last remnants of heating demand evaporating. There are now indications that the bullish temperature adjusted supply/demand balance is also relaxing. [For background on the concept of temperature adjusted supply/demand, see the box below.] 

2. Price Outlook: If the temperature adjusted supply/demand balance begins to ease, further price weakness is quite possible.  Considering the huge storage surplus, there is little room for any bearish fundamental factors without introducing significant risk of storage capacity issues later in the injection season. With above normal temperatures still forecast into mid-April, weather remains a bearish factor.  On a national basis, above normal temperatures do not begin to increase demand until late May and into June. CFTC data indicated a slight decrease in the speculative short interest despite the continued price weakness. The net short interest is not considered significant. CME futures open interest remains over 1.2 million contracts.  Total open interest across the complex dropped below the 6 million contract mark with the April option and futures contract expirations.

3. Weekly Storage: US working gas storage rose 57 BCF for the week ending March 23. Current inventory levels of 2,437 BCF now are 813 BCF (50.1%) above last year while surpassing the 5 year average by 896 BCF (58.2%). Canadian storage levels are also considered bearish with inventories at 69% of capacity.

4. Storage Outlook: The implications of last week’s 57 BCF injection are quite significant. This indicates a material loosening in the temperature adjusted supply/demand balance. There is a non-linear temperature demand effect and if large injections are apparent with temperatures near 70 degrees, storage capacity issues may be a problem.

5. Supply Trends: Total supply rose 0.3 BCF/D to 67.6 BCF/D as a US production increase offset a fall in Canadian imports. LNG imports and Mexican exports were unchanged. The US Baker Hughes total rig count rose with both oil and natural gas activity improving. Canadian rigs followed the seasonal trend lower and thus the total North American rig count fell 85 to 2,235. Canadian rig activity typically declines until late April or early May. The total North American rig count now stands 174 higher than last year. The higher efficiency horizontal rig count increased and is only 5 rigs behind the January 27 record 1,185.

6. Demand Trends: Total demand fell 3.0 BCF/D to 59.1 BCF/D as a rise in power demand was outweighed by drops in the residential/commercial and industrial sectors. Electricity demand rose 151 gigawatt-hrs to 68,554 which is 2,088 (3.0%) below last year and 1,724 (2.5%) behind the 5 year average. Above normal temperatures will not lift total demand until late May or even June on a national basis.

7. Other Factors: US equity markets resumed their ascent with optimism regarding continued easy monetary policy supportive. Equity earnings reports may increase stock market volatility in coming weeks.

We’ve got something new on RBN starting last week.  Check out Updata’s daily technical analysis for natural gas and crude markets here.