The coldest morning of the year—by a considerable margin—is unfolding in the early dawn hours across the Northern Great Plains, Midwest, Great Lakes, Mid-Atlantic, and Northeast where temperatures 15-25 degrees below average are spurring a surge in natural gas heating demand. Minneapolis tumbled to -15F, Chicago to 1F, and even New York City and Philadelphia found their way into the lower 20s under a fresh coating of snow. Speaking of Minneapolis, yesterday’s high temperature was just -5F, which marked the first time since January 15, 2009--a record 1466 days--that the high failed to reach 0F.
Today, the core of the coldest air and greatest departures will shift eastward slightly, with highs 20-30 degrees below average across the Great Lakes and the Northeast. Highs in Chicago, Cleveland, and Detroit will be lucky to break double digits today while the big cities of the Northeast will be gridlocked in the 20s, including Washington DC where President Obama will enjoy the first full day of his second term cloistered around his fireplace and/or natural gas heater. Other than the cold, the nation will enjoy a largely quiet day meteorologically speaking, with a weak coastal storm brushing New England with light snows in Boston and lake effect snows continuing in bands downwind of all of the Great Lakes sans Huron. I am projecting a new season-high natural gas withdrawal today, in the 31-33 BCF range, 6-8 BCF above the five-year mean daily withdrawal of -25 BCF.
Fortunately for the good folks of Minnesota and adjacent areas, the cold will peak today, not only in North, by on a nationwide basis as well. Milder air will return beginning tomorrow primarily across Texas, New Mexico, and Oklahoma, where temperatures will be 10-15 degrees above average. The warmth will spread northward into the Intermountain West and eastward into the Southern Great Plains by Friday, but will largely fail to make grounds east of the Mississippi River, where temperatures will remain 10-20 degrees below average for the duration of the Storage Week. As a result, the effect on natural gas demand will be somewhat muted, and my model is still projecting solid, if unspectacular, withdrawals in the 20-24 BCF/day range by Thursday and Friday. For the week of January 19-25, I am projecting a net withdrawal of -191 BCF, down 6 BCF overnight, and 13 BCF greater than the five-year mean withdrawal of -178 BCF. The only thing that may prevent this week from attaining the year’s second 200+ BCF weekly withdrawal is a very warm start to the week with withdrawals for the two-day weekend not even reaching 30 BCF. It should also be noted that this week’s five-year mean of -178 BCF is greatest weekly mean withdrawal of the season and beginning next week, we begin our slow trek back towards the injection season.
By the beginning of next week, warmer temperatures will infiltrate all parts of the country, including the East, leading to a considerable decline in natural gas demand into the 15-20 BCF range by next Monday and Tuesday. However, the warm-up will be shortlived, as a potent dip in the jetstream across the middle of the nation will funnel a new impulse of cold air southward by Wednesday and Thursday of next week, returning natural gas demand to above it’s seasonal averages for the remainder of the week as the cool airmass persists. For the week of January 26-February 1, my model is projecting a net withdrawal of –165, up 16 BCF overnight, and equal to the five-year mean withdrawal.
The extended forecast has warmed somewhat over the last 48 hours but continues to suggest a seasonally cool pattern for the first two weeks of February, with above average temperatures across the west, near average temperatures across the country’s midsection, and below average temperatures across the East. For the week of February 2-8, I am projecting a net withdrawal –173 BCF, up 13 BCF overnight, but still a respectable 19 BCF greater than the five-year mean withdrawal of -154 BCF. And for the week of February 9-15, I am projecting a net withdrawal of –165 BCF, up 7 BCF overnight, and 25 BCF greater than the five-year mean withdrawal of -140 BCF.
The EIA will release its weekly storage report on Thursday, January 24, at 10:30 as normally scheduled, yesterday’s Martin Luther King trading holiday notwithstanding. For the week ending last Friday, January 18, I am projecting a net withdrawal of -166 BCF, down 4 BCF, and 10 BCF less than the 5-year mean withdrawal of -176 BCF. Early last week, I was projecting a withdrawal of around -140 BCF which drifted steadily downward over the course of the week as a persistent train of moisture over a stalled out cold front across the Ohio Valley kept daily highs suppressed across a densely populated portion of the country leading to increased heating demand. Interestingly, supplies also fell by 162 BCF this week last year. Early analyst estimates are not particularly helpful, ranging from 122-190 BCF.
Natural gas closed Friday up 2.25% to close at $3.57/MMBTU, up 6.8% and the second consecutive week of 5%+ gains. During Futures Trading yesterday, the commodity gained a further 1.75% to reach $3.63/MMBTU. Since falling to a four-month low of $3.09/MMBTU on January 8, prices have surged 15% to reach a six-week high. The commodity has, as is typical this time of year, traded in-step with the weather as traders react, counter-react, and overreact to near- and extended-term temperature forecasts. However, for the second consecutive week, last week’s EIA storage report of -148 BCF came in well above analyst estimates as well as my own model which, due to its heavy weighting on temperature and weather data, suggests that we are seeing an increased “BCF per Degree Day”, something which may be indicative of a broader scale organic increase in demand and/or decreased production (note: my model adapts to weekly trends, so last week’s underestimate will be integrated into the model’s core data and aid to improve the model’s accuracy this week and subsequent weeks). Two week’s does not a trend make, but this is a bullish trend that will need to be monitored closely over the next month.
I’m as big a cheerleader as the next man, but, this all being said, there is no denying that natural gas is extended and trading at the top of its range. I am estimating that over the next five weeks the current storage surplus will contract by 43 BCF, should the current forecast hold. As such, when all five weeks of projections are integrated into my fundamental “fair price” model, natural gas is trading at a modest premium of 16 cents to the current price.
However, when current storage alone is considered, the commodity is trading at a very large 35 cent premium to a “fair-price” of $3.22/MMBTU. Even when the higher-confidence 3-week projections are considered, the commodity is still trading at an impressive premium of 30 cents. All of this suggests that investors are not only placing substantial confidence in the long-term forecast at an increased risk for a rapid correction should the forecast trend warmer, but are expecting either for the forecast to cool further or for temperatures in the third and fourth weeks of February to remain below average as well. My pricing models, which have performed admirably during the course of this two week rally, are now backing off considerably, with win:loss ratios in the 0.6-1.8 range and projected 30 day gains of between -2% to +5%, based on historical precedent given similar fundamentals and projections.
At the risk of sounding like a broken record, it is my belief that natural gas will have considerable trouble pushing higher and remaining there given the somewhat tenuous forecast and recent rally. I posit that a pullback into the $3.40s is not only likely, but healthy for the commodity to shake out some of the weaker hands before a push towards $4.00/MMBTU. I will continue to hold my position having witnessed many times before the short-term irrationality of momentum, but, if I was holding onto 30%+ gains via UGAZ or one of the other leveraged ETFs, I would consider taking profits here and reloading at a lower level.
For today’s report, I am projecting a final net withdrawal of -166 BCF which is 10 BCF less than the five-year mean withdrawal of -176 BCF, but 4 BCF improved over last year’s withdrawal of -162 BCF. By comparison, a Dow Jones Newswire survey is reporting a mean analyst projection of -164 BCF. I expect that a withdrawal greater than -170 BCF will be viewed as sufficiently bullish to prolong the rally at least one more day, while a withdrawal between 160-170 BCF will be viewed as neutral with prices equally likely to rally or pull back, while a withdrawal less than 160 BCF will mostly likely be viewed as disappointing leading to a pullback and possible re-evaluation of the recent price spike.
nice analysis but the key is that such analysis is based on the past. The present is market that was over supplied last year where the over supply has steadily been shrinking for months. This posters guess on value forgets what happens once the market realizes that production has begun to drop at the same time there is no surplus left in storage and usage is running significantly higher than last year
I wish I could read the report for late 2011 and early 2012. For many of us the past estimates for what was happening in 2012 was completely wrong. You needed to understand that a lot of leases required drilling even while the winter was warm and there were plenty of people like COG and RRC that were drilling for cash flow instead of drilling for profit. I think most of this has been ironed out. If this winter continues to be cold then nat gas gets to $5 sooner but for the longer term it would be better if it warmed up and prices stay under $4 because in another year without much drilling the nat gas deficit next fall and winter can drive prices above $5 for an extended period
" the commodity is trading at a very large 35 cent premium to a “fair-price” of $3.22"?
I think your models are to simplistic. My models show FMV of $3.9. Weather is important, but will become less so as we move thru 2015. Supply and non-weather related demand are more important IMHO.
Demand coming on-line this year is a key vector in the FMV of NG. I am still finishing up my new NG demand DB for 2013-2017, and this will further refine my NG forecasts....
Weather is 75% of the demand so I'd say it is very important. All of that "non-weather demand" in 2015 will be priced in when 2015 comes around. Nobody takes delivery now for 2015. Storage could become a problem and you could see $1 vs. $3.9.
In any case, EIA said Nat gas at $6 in 10 years from now. This assumes 2 LNG terminals.
Big development is that variable costs will go down for drillers / producers, so they'll be pumping more of nat gas to cover fixed costs and debt, bringing in more supply.
Caterpillar's new engines run on 75% nat gas / 25% diesel vs. 100% diesel as used now. This will require more capex from drillers, but variable costs will plummet. So they'll make some nice coin when they buy the new engines, plus they'll be enticed to produce much more.
These projections are based on temperature and weather forecasts which change daily, particularly the extended forecasts. I update all projections daily, provide intraday supply/demand stats, and issue discussions similar to the one above on my site at powerburnDOTblogspotDOTcom. Thank you for your interest.
Hello Powerburnbtu your site doesnt end in DOTcom its DOTca your using the canadian DOTCOM which is DOTCA i also looked at your projected figures and see you have to be using a calulated draw or build which automatically udates. I was curious which system are you using? Also your daily NG production output from NG wells never changes only your daily usage based on temps. When rig counts change daily total output from NG wells should be changed dont you think? If you can figure the output based on wells coming online or offline and the Baker Hughes report wouldnt you get a more accurate number? Just something i thought about after following your site and i am sure you know more about this then i do, i was just curious on NG output never being updated.