It is my pleasure to make public some of my past private commentary on natural gas markets.  My goal is to bring this commentary back to life by reposting old comments from an important historical episode and including some fresh commentary around what has changed, and what has not.  

I think this can be a useful exercise for market commentators -- not to cherry pick their calls and pad their public profile, but to provide outsiders with a glimpse into their past work.  I think this exercise can even help us have a better understanding of what is happening now.

This is the first in a series of articles that I intend to publish on this theme.  This one starts to talk about my experience during the polar vortex. If you don’t know about the wild market action that happened around this recent, historic event, then stay tuned. Enjoy! 


Record Inventory Deficit & EOS Estimates Drive NatGas Futures to Four Year High; Reuters & Bank of America EOS Estimates

By Connor J Sarsfield - Vancouver, January 27th, 2014

  • Front-month futures rocket 10% to settle at $5.182/mmBtu
  • Forward looking gas draws set to increase storage deficits
  • EOS inventory targets 1.0 - 1.35 Tcf
  • Inventories set to hit six-year low in late March

U.S. natural gas futures trading in New York exploded on Friday, rallying 10% on the day and settling above the significant $5/mmBtu level for the first time since June 2010 as a prolonged winter heating season has raised concerns regarding where domestic inventories will end the winter heating season in late March. Temperatures this winter for the U.S. have run well below normal for key population centers in the Midwest and Northeast, while the latest January to date temperature anomalies have run 1 Celius below normal for the entire country (see CFSv2 image below). Futures prices have posted remarkable gains over the last week, sky rocketing 20% as weather forecasts indicate that February will continue much colder than normal for the majority of the U.S. Given the current forecast, this trend is set to continue well into February and will require additional weeks of large inventory drawdowns to satisfy power generation and residential and commercial heating demand going forward.


One of the key underlying factors of the natural gas market, and certainly one that has underscored the severity and strength of this year's winter heating demand, is where gas inventories will end the winter heating season in March when the market rebalances back towards the supply side and weekly withdrawals transition to injections. Such a benchmark is important due to long term projections of where inventories will top out before the next 2014/2015 heating season and this benchmark acts as an important proxy when taking into consideration supply, demand, and price forecasts before the U.S. undergoes another heating season. 

With below normal temperatures and record heating demand expected to continue, U.S. natural gas storage levels are expected to hit near 10 year lows by the end of the heating season in late March. The table below illustrates forwarding looking weekly natural gas withdrawals out to theEIA week 2/13 in relation to the various weather models (GFS/Euro) and industry weather vendors (WSI/MDA). 

GFS = 960 Bcf draw by the week ending Feb 13th = total 1.463 Tcf
ECMWF/Euro = 909 Bcf by the week ending Feb 13th = total 1.514 Tcf
WSI = 902 Bcf by week ending Feb 13th = total 1.521 Tcf
MDA EarthSat = 895 Bcf by week ending Feb 13th = total 1.528 Tcf

Taking into account an average of the projections listed above, natural gas inventories will hit record lows by the second week of February around the 1.4 to 1.6 Tcf mark with an additional 6-8 weeks left of draw downs before temperatures moderate to the point where supply begins to outstrip demand in the form of weekly gas injections. Such projections on storage and weather forecasts have forced many analysts and investment banks to drastically lower their end of storage (EOS) estimates for late March, as the market would only need an average drawdown of -70 Bcf per week from mid February to EOS to end sub 1.0 Tcf.

Bank of America (B of A) reiterated in a research note last week that two months of winter weather in terms of heating degree-days (HDDs) is still ahead of the market and thus weather risk remains considerable when factoring in EOS estimates going forward. If the colder than average weather/higher HDDs were to persist through March, inventories could end well below 1 Tcf, likely pushing prices well above the current range, according to B of A. Moreover, even if normal or warm weather resumes in mid-February, the draws to date have been large enough to ensure that the spring EOS walkout will fall below 1.2 Tcf, a level not seen since 2008 due to a combination of record shale gas production and three consecutive mild winters that have kept inventories at relative high levels. 

The Reuters energy desk see a similar set of circumstances going forward with their industry poll showing EOS may hit a six-year low by the end of March. According to a new poll of 28 industry traders and analysts, Reuters estimate that gas stocks at the end of the winter heating season in late March could hit 1.23 trillion cubic, the same realized level seen in 2008. This would mark a six-year low and well below last year's ending inventory of 1.67 Tcf and the five-year average of 1.78 Tcf. The Reuters poll forecasts ranged widely from a 10 year low of 1.0 Tcf to a high of 1.4 Tcf.

The record 2.6 Tcf of gas expected to be withdrawn from storage by March will mean that utilities will have to inject more gas between April and October than ever before just to get stockpiles back to the comfortable 3.86 Tcf five-year average before next winter. Many analysts see this is a tough task given utilities have injected an average 2.08 Tcf into storage during the April-October injection season over the last five years. In order to get stockpiles back to comfortable levels by next winter, prices this year will have to rise to levels that encourage a combination of production response or demand destruction to bring balance back to the market. Rumors that higher prices will encourage more drilling have shown little to no evidence, as the correlation between the rig count and daily production numbers has decoupled due to the years of lag time between drilling a well and production volumes showing up at various hubs. Even with the natural gas market's ability to rebalance the supply and demand equilibrium through pricing scales, doubts have arisen in the energy sector whether the U.S. can fill storage back to comfortable levels before the onslaught of another winter heating season, a truly bullish signal for a market that has shown incredible moves over the last 3 months. 

The list below shows end of storage (EOS) March inventories back to 2008 in comparison to 2014 projections.

2003 EOS = April 11th @ 0.642 Tcf
2004 EOS = March 26th @ 1.014 Tcf
2005 EOS = March 25th @ 1.239 Tcf
2006 EOS = March 31st @ 1.695 Tcf
2007 EOS = March 23rd @ 1.511 Tcf
2008 EOS = April 4th @ 1.234 Tcf
2009 EOS = March 13th @ 1.651 Tcf
2010 EOS = March 12th @ 1.615 Tcf
2011 EOS = April 1st @ 1.579 Tcf
2012 EOS = March 9th @ 2.369 Tcf
2013 EOS = April 5th @ 1.673 Tcf

Sources:

The United States Energy Information Administration (EIA)

The Commodity Weather Group (CWG)

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My comments on this letter are short and sweet: we could end up in a similar situation as I was describing in this report with record storage deficits in 2017 on an average winter. If things get cold, then watch out. This could get even more severe in 2018, given how a lot of long-term developments continue to affect the domestic US gas markets. We could see some extremely bullish reactions in price that may take a lot of people by surprise.

By Connor Sarsfield, CJS Trading.