Posted: Oct. 22nd 2020
Research Natural Gas Storage Report – 22 October 2020
US natural gas inventories increased by 49 Bcf for the week ending October 9, compared with the five-year (2015–19) average net increase of 75 Bcf. Working gas stocks total 3,926 Bcf, which is 327 Bcf higher than the five-year average and 345 Bcf higher than last year at this time. Analysts’ expectations had been for an injection of 52 Bcf. The weekly storage report was mostly in-line with market estimates. At this point, it is going to take a pretty big surprise in the storage report to shift the market upon release of the data. With two reporting weeks left in the traditional injection season, the market’s attempt to hit 4 TCF looks promising. However, traders are eagerly paying more attention to some short-term weather outlooks. Although weather forecasts in the 6-to-10 and 8-to-14-day period all agree that some colder air is expected to hit parts of the country in the next few days, the degree of the cold and how far widespread that cold will be felt are questions that are all up for debate. Weather models have limited confidence in predicting answers to these questions. As November 1 is coming up soon, the impact of the answers to those questions on near-term pricing could be dramatic. Over the next few days, if weather forecasts gain confidence in a severer or more widespread cold, November futures could surge to the $3.25-$3.50 prior to expiration. If the weather forecasts look much less bullish in the coming days, the November contract could retrace back to the $2.75-$2.80 level prior to expiration. While weather is likely to be key driver in November pricing, the fundamental supply vs. demand picture continues to become more and more bullish over the longer-term. LNG feedgas demand is currently at 8.5 BCF/day as Hurricane related reductions/outages at Sabine Pass LNG and Cameron LNG are now mostly restored. Global LNG economics favor US LNG over steadily increasing pricing for Asia and European supplies. LNG feedgas demand is likely to exceed 9.5-10.0 BCF in the next few weeks. Mexican pipeline exports have an average almost 6.5 BCF/day in October. Expectations are that this demand level will also remain very strong for the next few months. Unless the upcoming heating season is extremely warm like last year and the year before, ResCom demand should increase YOY in the coming months. While key natural gas demand components are seeing growth, natural gas supply growth is down over 8 BCF/day from a year ago levels with the loss of associated gas supply from crude oil production. With crude oil prices still trading in the low $40/bbl range, the economics don’t support an increase in drilling with the exception of parts of the Permian basin. If supply only grows moderately as expected in 2021, natural gas demand will outpace supply by almost 4 BCF/day in 2021. This translates into an extremely tight storage situation next summer and going into winter 2022. All evidence is pointing to higher prices yet to come in 2021 and a potential surge in winter prices heading into 2022. Hedging long-term exposure needs to be considered soon-rather-than-later for end-users.