Its tough for anyone to make a natural gas supply/demand forecast without know how cold it will be this winter. Henry Hub (HH) gas prices have fallen back to ~$2.80 in July despite gas storage being 725 bcf lower YoY and the summer gas storage injection season being almost 50% finished. HH prices and natural gas tone are being held back by US gas supply being up ~8 bcf/d YoY in 2018. We are now seeing increasing expectations for an El Nino winter, which typically means a warmer winter. This means markets are going to focus soon on winter weather and will worry that the combination of a warm winter and continued high US gas supply will lead to very low gas storage withdraws this winter. There can be a huge swing in winter residential and commercial natural gas demand between a very warm winter and a cold winter or even a normal winter. But we just came through a very warm winter and not a normal or cold winter. If the EIA’s call is right on US gas exports, industrial demand and electric power demand (ie. before considering changes in residential and commercial demand), storage at Apr 1/19 should only be ~270 bcf higher YoY even if its as warm as just finished very warm winter. Residential and commercial demand forecasts will be wrong depending on the weather and will be changed depending on how El Nino develops. The purpose of this blog is to illustrate the math on where storage should be on Apr 1/19 if its as warm as the just finished very warm winter. Its been a great Q2/18 for storage despite the record US gas supply. Weather and storage have surprised to positive with a very cold April and record/near record May and June. The math is showing that if its another warm winter like last year storage at Apr 1/19 should only be ~270 bcf higher YoY. This will bring a negative to natural gas, but not a big negative and likely a relief that demand is doing a good job of absorbing or mostly absorbing the big increases in US gas supply.
The big holdback to 2018 and 2019 HH gas prices is massive increases in record US gas production. The EIA released its Short Term Energy Outlook (STEO) July 2018 [LINK] on Tues afternoon. July followed the forecast shift in the June STEO with the EIA increasing its 2018 and 2019 natural gas supply forecasts. This a reversal from the May STEO that had a big decrease in US gas supply forecasts. The July STEO forecast for 2018 natural gas is 81.34 bcf/d, up 7.77 bcf/d YoY from 73.57 bcf/d in 2017. The STEO notes Q1/18 gas supply of 78.53 bcf/d (up 7.29 bcf/d YoY), and Q2/18 gas supply of 80.95 bcf/d (up 8.91 bcf/d YoY). EIA increased its 2019 forecast by 0.68 bcf/d to 84.46 bcf/d, which would be up 3.12 bcf/d YoY.
Q2 weather has been a big plus to storage – very cold in April but record or near record heat in May/June. Its been a good H1/18 YoY for LNG exports (+1.05 bcf/d , 191 bcf) , industrial demand (+1.11 bcf/d 202 bcf) and electric power demand (+3.59 bcf/d, 650 bcf). These are overlooked and illustrate how less weather dependent demand like industrial and LNG exports are strong and a key reason why the big increase in US gas supply is being absorbed this summer. But the weather wildcard in Q2/18 has been as good as it can get with very cold April, record heat in May and near record heat in June. NOAA’s monthly recap of US weather noted April was the 13th coldest in the last 124 years [LINK], May was the hottest in he last 124 years [LINK], and June was the 3rd hottest in the last 124 years [LINK].
H1/18 storage has surprised to the positive in the face of record US gas supply. Gas storage ended 2017 (at Dec 29, 2017) at 3.126 tcf, which was 192 bcf lower YoY. Storage at the end of the winter withdraw season (March 30, 2018) was 1.354 bcf, which was 697 bcf lower YoY. This YoY storage deficit has not narrowed as expected in the shoulder season. There have been 15 weeks of storage injection, including the week of July 6, of storage injections. Today, the EIA reported storage was 2.203 tcf as of July 6, which is still 725 bcf lower YoY. There are 17 weeks to go before the start of the traditional winter withdraw season on Nov 1, which means that the YoY deficit has to be reduced by 43 bcf to eliminate the 725 YoY deficit by the start of the winter. In all likelihood, gas storage should enter the winter withdraw season with lower YoY storage levels, likely close to 200 bcf lower YoY ie, most but not all of the current 725 bcf deficit is eliminated.
Looking ahead to winter storage, increasing US gas exports are a big positive. The higher YoY US gas supply has overshadowed continued increases in US gas exports, both LNG exports and net pipeline exports. The EIA STEO does not break out the net pipeline exports by country (ie. Canada vs Mexico), but the EIA STEO July 2018 estimates higher net pipeline exports of 1.61 bcf/d YoY in Q4/18 and 2.40 bcf/d YoY in Q1/19. The EIA STEO forecasts the US to move to a net pipeline exporter in Q4/18. The EIA STEO also assumes continued growth in LNG exports, up 0.62 bcf/d YoY in Q4/18 and up 1.35 bcf/d YoY in Q1/19.
But winter natural gas markets always come down to weather. Winter weather is the major natural gas demand swing factor in any year, and even moreso than summer weather. The below graph is from the NGSA’s winter 2017/2018 natural gas outlook [LINK]. It shows how a mild to cold winter can swing winter natural gas demand by over 2,400 bcf or 16 bcf/d, and a warm to normal winter can swing demand by 600 to 700 bcf (4 to 4.6 bcf/d). The correlation is direct – its cold, you turn the furnace that is fired by natural gas. In the summer, its hot, you turn the air conditioner on that is run by electricity that can be fueled by natural gas, solar, wind, coal, hydro, etc.
Winter Natural Gas Demand For Residential/Commercial Sectors
Source: NGSA
Increasing probability for El Nino winter vs expectations a few months ago for a normal winter. One negative change emerged in Q2/18 is has been that the long term weather forecasts are changing from a normal winter to one that is increasingly expected to be an El Nino winter. Today, NOAA’s Climate Prediction Center (CPC) posted it updated “El Nino/Southern Oscillation Diagnostic Discussion” [LINK], which is basically their forecast probability for El Nino, La Nina or neither. El Nino winters tend to be warmer than normal in the northern US ie. negative for residential and commercial natural gas demand. The CPC’s July 12 update said “ENSO-neutral is favored through Northern Hemisphere summer 2018, with the chance for El Niño increasing to about 65% during fall, and to about 70% during winter 2018-19”.
The just finished 2017/2018 winter was very warm. Fortunately, as we look ahead to the upcoming 2018/2019 winter, the YoY comparison will be against a just finished very warm winter as opposed to a comparison to a normal or cold winter. NOAA monthly weather recaps note that Q1/18 was the 87th warmest of the last 124 years, December was the 93rd warmest of the last 123 years [LINK], and November was the 117th warmest of the last 123 years [LINK]
Even if it is as warm as last winter, gas storage should only be ~270 bcf higher at Apr 1/19. The problem with any 2018/2019 winter natural gas demand forecasts is that they will change significantly if the El Nino develops in time for the winter and, if so, the strength of the El Nino. But even with the dramatically higher YoY US gas supply, the math shows that storage should only be ~270 bcf higher YoY at Apr 1/19. At the same time, if it becomes a normal winter with typical higher residential/commercial demand spread as per the NGSA, then gas storage could end up ~350 bcf lower YoY. But to be fair, last winter was very warm but not record warmth and if this winter turns out to be record or near record warm winter would lead to a much larger YoY increase to gas storage at Apr 1/19. Below is our calculation table assuming (i) EIA STEO July estimates for US gas supply, net LNG exports, net pipeline exports, industrial demand and electric power demand, and (ii) Nov 1/18 storage is 200 bcf lower YoY. It shows that the winter surplus pre any change in residential and commercial demand (ie. how cold it is) will be 267 bcf more in storage at Apr 1/19.
Winter Natural Gas Demand For Residential/Commercial Sectors
Source: EIA, Stream Asset Financial
Another warm winter shouldn’t be a big negative to natural gas. The growth in US gas supply is not expected to slow down, which is why US gas supply being up ~8 bcf/d YoY is the dominant natural gas price and tone factor. Storage levels have surprised to the positive (continued lower YoY storage) this summer as demand is absorbing most of the increasing US gas supply. The hold back on HH prices will continue with the increasing probability for an El Nino winter. The purpose of this blog was to remind that the just passed winter was very warm and to show the relevant math on how another warm winter will be negative but not necessarily a big negative to natural gas. Storage should only be ~270 bcf higher at Apr 1/19 if residential and commercial demand was the same this winter as the just passed very warm winter. Its why we say another warm winter would be a negative, but not a big negative to natural gas. At the same time, if the winter turns out to be normal or even close to normal, as storage will be lower YoY on Apr 1/19 and a big boost to natural gas. It also reinforces the strength in natural gas demand (industrial, LNG exports) that is less weather related is means we don’t need a cold winter, only a normal winter, to absorb the big increases in US gas supply.