Welcome to our newsletter
While some chilly weather is forecasted, we must remember that everything is relative. Below normal temperatures at the end of April do not have nearly the same impact as below normal temperatures in the heart of winter, especially with regard to demand for natural gas. Certainly we may see some homes turn their heaters on for a few days, but given the current supply situation in the United States, the upcoming cold wave should in the end have minimal impact on natural gas prices.
The key consumption areas in the Midwest and East are normal to slightly above normal. We will be keeping a watchful eye on those forecasts to see how they change over the coming months. Average weather will only help expedite reaching “full” storage.
Inventory levels continue to set records. The premium to last year actually dropped slightly to just 871 BCF while the premium to the 5 year average currently is over 900 BCF. We are currently at 2,512 BCF in storage, a level that was not reached last year until early July. In November of 2011, the United States hit its highest level of gas in storage ever at 3,851 BCF. The question this year is not if we will set a new record, but when.
In order to go from our current level of 2,512 to the record 3,851 BCF, we have to add another 1,339 BCF and there are more than 28 injection weeks left in the summer. That means that we can average an injection of 48 BCF per week for the next weeks and we will hit the record storage level. To put 48 BCF per week into perspective, we looked at the average injection per week last year and on the 5 year average. Last year, over the same 28 weeks, we averaged 76 BCF per week and the 5 year average similarly averaged 73 BCF per week.
Clearly we will be reaching full storage and eclipsing records highs this summer. If we inject an average of 73 BCF per week over the next 19 weeks, then we will hit 3,900 BCF. We would be at the highest storage level ever in early September and still have more than month of injections to go. Additional demand for natural gas in the form electric generation could mean some smaller injections and therefore delay reaching the record, but even such incremental demand will not prevent us from making an all time record at some point this summer.
The NYMEX Natural Gas Futures Market
The prompt month natural gas futures contract is now below $2 per MMBtu for the first time in 10 years. It took a while to break below $2 but we have done so and, for now, have found a new home in the $1.90-$2.00 trading range. The break below $2 was not alarming to traders and analysts as it simply too difficult to ignore the overwhelmingly bearish fundamentals in place. Some traders are in fact now asking whether or not the futures market has a chance to drop below $1 per MMBtu.
While some traders are wondering whether or not the $1 barrier will be the next threshold to break, we would advise not getting too far ahead of ourselves on that front. As has been mentioned many times before, when everybody expects the market to do one thing is the exact time it chooses to do the opposite. With so many people lining up in the bearish camp, we can’t help but wonder if the market may not drop as severely as most everyone expects. While we certainly aren’t bullish at all, we are hesitant to think that market will continue to implode without any resistance.
The graph below charts the prompt month natural gas future’s contract since March 1st when the prompt month was trading around $2.50. As you can see by looking at the blue line in the graph, it has been a steady decline for almost two months that eventually resulted in breaking below $2. From an end user perspective, it is also nice to see other months in futures market moving lower as well. The graph also charts the January 2013, January 2014, and January 2015 contracts over the same time period. While the prompt month shed more than fifty cents since March 1st, January 2013 dropped $0.361, January 2014 dropped $0.267, and January 2015 dropped $0.261.
End users should look at this information and carefully weigh the options both in the short term and the long term. As we have discussed in great lengths, the immediate short term is showing some very bearish signs. The supply glut is large and there is simply not enough demand. However, this bearishness does not necessarily hold true for a longer timeframe like three to five years. Multiple factors could swing the supply and demand balance. Alternative uses for natural gas in the form of electric generation, as an export to other countries willing to pay higher prices, or as a vehicular fuel could dramatically increase demand for natural gas. Additionally, regulation on drilling could negatively impact supply. Given these possibilities and the drop in prices in the outer months, end users must consider the notion of locking in longer term gas requirements. Focusing in on the upcoming winter of 2012- 2013, many market analysts track the storage spread between summer and winter prices. Storage enables us to inject some gas in the summertime at presumably cheaper prices than when we actually consume the gas in the winter. By looking at the average of the summer months prices and comparing it to the average of the winter months prices, that difference is referred to as the storage spread.