Increasing Temperature Sensitivity as Cold Weather Spikes Demand and Also Reduces Supply

Highlights of the Natural Gas Summary and Outlook for November 21 2014 follow. The full report is available at the link below.

Natural Gas Summary and Outlook

• Price Action: The December contract rose 24.6 cents (6.1%) to $4.266 on a 41.9 cent range.
• Price Outlook: The market remained well above the low while barely missing a new high to record a rare inside week. Of the 777 weeks since January 2000, only 67 have not recorded a new high or low compared to the previous week. There have actually been 87 weeks which have recorded both a new high and low. The market is again closer to last week’s low and weather forecasts were moderating at weeks’ end. Thus, a new low is the expected outcome. However, that remains highly dependent on the temperature forecasts and with the possible illiquidity due to the Thanksgiving Holiday, volatility may be exceptionally high. The increase in the managed money net long position ended. However, the reduction in the position was minimal. There is still plenty of room for more buying or price weakness could precipitate selling. Total open interest rose to 3.81 million as of November 18 with the option related position also rising. CME futures aggregated open interest fell to 954,000 as of November 20.
• Weekly Storage: US working gas storage for the week ending November 14 indicated a draw of 17 bcf. Thus total working gas inventories fell to 3,594 bcf. Current inventories fall 195 bcf (5.1%) below last year and 241 bcf (6.3%) behind the 5 year average.
• Storage Outlook: The larger than expected draw actually increased the deficit to the 5 year average and this was the first increase to the 5 year deficit since April 11. Even considering a still generally bullish weather forecast, inventories are likely to completely eliminate the yearly deficit and move above last year in mid-December.
• Supply Trends: Total supply fell 0.4 bcf/d to 74.1 bcf/d. US production fell while Canadian imports and Mexican exports rose. LNG imports were unchanged. The US Baker Hughes rig count rose 1 as oil activity slipped while natural gas rose. The total US count now stands at 1,929. The Canadian rig count rose 32 to 434. Thus, the total North American rig count rose 33 to 2,363 and now surpasses last year by 234. The higher efficiency US horizontal rig count rose 3 to a record 1,372 and rises 245 above last year.
• Demand Trends: Total demand rose 7.0 bcf/d to 73.0 bcf/d. All sectors were higher. Electricity demand rose 4,575 gigawatt-hrs to 74,460, which exceeds last year by 2,361 (3.3%) and the 5 year average by 3,423 (4.8%). Demand appears to have exceeded 100 bcf during the recent cold snap.
• Other Factors: The S&P 500 continued to climb with global central bank action considered important.
• Our proprietary heating index is at the highest of the last 5 years with a forecast through December 5. The total index stands at 624 compared to 593 for 2013/14, 521 for 2012/13, 480 for 2011/12 and 541 for 2010/11.
• The recent supply disruptions highlight the exponentially increasing temperature sensitivity of the natural gas supply/demand balance as cold weather spikes demand and also reduces supply.