25 Oct

Natural Gas – bundle up

Categories: Daily Comments

Natural Gas – bundle up                                                             

September 21, 2018

Image result for natural gas rig


A number of leading meteorologists are predicting a colder than average winter for 2018-19, and if the sub-arctic temperatures and snow storms of recent years return to parts of Europe and North America natural gas prices may be set for a strong rally. Combine an exceptionally cold winter with low natural gas inventories, and we have the potential for natural gas shortages and upward price pressure.

Data indicates that US total natural gas storage at the beginning of September was 20.1% lower than the same time last year, and 18.4% below the 5-year average. These low storage levels can be attributed to exceptionally hot weather during the summer months which pushed up demand for air conditioning, and this was on the back of a cold winter when heating demand rendered gas inventories depleted.

Even though inventory restocking will take place during autumn, the Energy Information Administration (EIA) forecasts that US natural gas inventories will only reach 3.3 trillion cubic feet (Tcf) by the end of October, which would still be 14% below the 5-year inventory average for the end of October. The last time inventory levels were as low as 3.3Tcf in October was in 2005, a year when natural gas prices jumped around 100% in four months.

Fundamentally, long-term natural gas demand dynamics remain strong as developing countries implement policies to shift toward cleaner burning fuel for power generation. China has been pushing reforms to combat extreme levels of pollution and smog that involve shifting its energy mix to include more natural gas. The Ministry of Petroleum and Natural Gas in India has also been pushing to further develop its natural gas industry to decrease reliance on coal.

US natural gas consumption is forecast to increase from 74.2 billion cubic feet per day (Bcf/d) in 2017 to 79.81Bcf/d in 2018, an increase of 5.6Bcf/d. Natural gas consumption forecasts for 2019 are slightly lower than 2018 at 79.67Bcf/d, but consumption expectations still remain strong.

Heating Degree Days (HDD), a measurement of energy demand for heating buildings according to temperature, can help provide insight into the expected economic impact of changes in the weather. The US EIA forecasts that from 2017 to 2018 HDD will increase by 11.3%, while Cooling Degree Days (CDD) are expected to increase by 6.6% over the same period.

While trying to predict the weather can be a speculative exercise, it appears that a bottom may be forming in natural gas since the December futures contract has risen over 5% in the past week.

Bundle up, winter is coming.



Disclaimer: Please note that while Valbury Capital has made every attempt to ensure the accuracy and reliability of the information provided in this document it can give no warranty of any kind. The information provided is intended to be of a factual nature only and is not intended to amount to investment advice or to contain any form of investment recommendation. No person should rely on or use the information provided to form any investment decision