Projections For Next 3 EIA Supply Reports: Pattern Shift On the Way
In its weekly Storage Report to be released tomorrow at 10:30 (one day early due to the Thanksgiving Financial Holiday), my models are projecting the EIA to report that a net 35 BCF of natural gas was withdrawn from storage during the week ending November 16, a draw 38 BCF greater than the five-year mean. Should this projection verify, this will be the second consecutive week that the reported change in storage is 30 BCF greater than the five-year mean.
For the week ending this Friday, November 23, my models continue to project a return to below average withdrawals, with an expectation of a net withdrawal of –6 BCF, unchanged overnight, and 12 BCF below the five-year mean of -18 BCF. Temperatures 15-20 degrees above average across the center of the nation are driving Midwestern demand far below seasonal norms and near-to-above average demand across cities on the East and West Coasts is unable to fully compensate.
Things get interesting the final week of November, the week of November 24-30. There has been an abrupt shift in the long-range forecasts over the last 48 hours. Where a large ridge of high pressure across the nation’s midsection had been indicated over the last couple of days to provide continued above-average temperatures next week, the weather pattern now looks to be dominated by a trough of low pressure across the East and Midwest that could send temperatures 10-15+ degrees below average across a large area, driving up natural gas demand, with only a small amount ridging confined to the Southwest. This is pattern much more typical of winter, with a cold pool of air across the Midwest and a southern storm track. As a result of the increased natural gas demand associated with the colder temperatures, projections for net withdrawals the week of November 24-30 have continued to plunge, down an additional 30 BCF overnight to -74, -23 BCF greater than the 5-year mean withdrawal for the week. Given the forecast trend, I would not be surprised to see this forecast trend even colder over the next few days.
Natural gas trended lower yesterday, with the December 2012 contract down 1.5% $3.71/MMBTU on the expectations of a return to warmer temperatures. Given the upcoming favorable supply report (although this has largely been priced-in over the last few trading days) as well as the sudden bullish shift in computer models regarding the long term forecast, I expect natural gas to find some support in the next week or two. The evolution of the long-term forecast will be crucial here as natural gas tries to find footing heading into the winter Heating Season. Should these brief, alternating warm and cold snaps continue, I see very limited upside potential for natural gas given the current near-record levels in storage. Essentially, think of it as the basketball team that trails by 30 points at halftime and is satisfied to trade baskets with the other team in the second half—sure, the lead doesn’t get any worse, but it doesn’t stop the fans from abandoning the home team and checking out early. On the other hand, should the pattern shift that the models are now calling for the final week of November verify and persist into December, this could provide the bullish boost needed to break--and remain above--the $4 barrier.
At what point to you predict the lower rig count will cause production to finally start declining meaningfully. I assume it hasn't yet because of wells already drilled that are now getting hooked up to pipelines. But maybe next quarter we will finally see production start to decline?? This is when i would think the move to 4.50 or 5.00 could occur when it becomes apparent we need to start drilling or run out of natural gas in 2014 if cold winters come.
What do you attribute the fall in the inventory to? Is it all demand or do you see supply falling off too? Reading some estimates from the companies themselves, it appears as if Q4 production will be lower YoY. Thank you.
The recent fall in inventory is almost entirely due to below average temperatures/elevated demand secondary to increased heating demand, along with some nuclear-to-gas switching due to above-average nuclear power outages. During the summer, the drop off in demand from the historic spring 2012 departure-from-average was due both to the hot summer and coal-to-gas switching due to suppressed natural gas prices. As prices have risen back above $3.50, switching has become less pronounced. As for production, there has been no appreciable decline, according to either the EIA or other stats I monitor, so far. Any decline in production due to the declining Rig Count has been so far mitigated by increased supply coming from the Marcellus Shale, an increase between September and January of up to 1.5-2 BCF/day, as new pipeline infrastructure comes online.
Like any projections based on forecasted events, these estimates will evolve in the coming weeks as the forecast is refined. I update my weekly supply projections daily as well as maintain continuously updated statistics for today's supply/demand picture at powerburnDOTblogspotDOTcom. Just a little bit of shameless self-promotion.