The mild winter in the U.S. thus far has created a balancing nightmare for the natural gas market. A freakishly warm December has meant below-average withdrawals and contributed to a record storage surplus over last winter’s levels. Not surprisingly, natural gas futures prices have been struggling under the weight of this surplus. However, a closer look at gas consumption over the past few weeks shows some underlying demand strength despite the warm weather. Today we take a closer look at where gas demand is coming from.
At the end of December 2015 in If I Could Turn Back Production, we examined the extent of the current storage surplus and presented several scenarios for how the market could balance in 2016 – including a few involving higher demand from a colder than normal January and February. With production remaining steady around 73 Bcf/d last fall, it became clear that it would take robust demand to keep the storage surplus from growing and prices from collapsing. However, that winter demand is highly dependent on cold weather, which drives residential and commercial heating demand. Trouble is, the winter was largely a no show until recent days. Let’s look at just how mild it has been.
A good way to quantify the impact of winter weather on gas demand is to look at heating degree days (HDDs), which measure heating demand for every outdoor degree below 65 degrees Fahrenheit (see Under the Weather for more on how Degree Days are calculated). Natural gas fundamental analysts look at HDD data in the winter to understand the relationship between cold weather and the resulting demand and storage withdrawals. The lower the HDDs, the lower the demand and storage withdrawals in the winter; and the higher the HDDs, the higher the demand and withdrawals.
Using HDD data from the National Weather Service’s National Centers for Environmental Prediction (NCEP) via Morningstar, Figure 1 shows weekly population-weighted HDDs from Nov. 1, 2011 through Jan. 1, 2016 (blue line), compared to the 30-year normal HDDs (black line). The orange lines show the difference between actual and normal HDDs, where a positive value means actual HDDs were above normal and a negative value means actuals were below normal.
What this graph shows us is that HDDs this winter (2015-2016) have not only been far below the previous two winters, which were exceptionally cold, but starting in December, they’ve also been well below the 30-yr normal (black line) and substantially below the last exceptionally mild winter of 2011-12. HDDs in the first nine full weeks of winter 2015-16 totaled 1,075. That is 340, or nearly 25%, fewer than the 30-yr normal, and nearly 200, or 15%, less than the same period in 2011-12. That’s warm winter weather.