COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 17, 2020 (2020-20)

PLEASE NOTE: I will be on vacation next week October 19-25 and will post only an abbreviated report summarizing highlights and showing a few key charts. Thanks for your understanding. 

Art

Highlights of this week’s report:

  • Spot natural gas prices increased sharply this week and recovered almost to late August levels.
  • Gas storage remains at record levels levels for early October.
  • Comparative inventory decreased -26 bcf. It was the largest decrease since February.
  • Temperatures are expected to be warmer than normal next week.

Comparative Inventory and Price Movements

Gas markets turned bullish this week as U.S. natural gas spot price rose +1.04 from $1.49 on October 8 to $2.53 on October 15 (Figure 1). Prices have now returned almost to late August levels.

Figure 1. U.S. natural gas spot price has increased almost to late August levels.
Price rose +$0.51 from $2.02 to $2.53.
Spot has increased +$1.20 (+90%) since August 24.
Source: EIA and Labyrinth Consulting Services, Inc.

Futures prices are rallying because they are based on November expectations whereas the spot market is based on the current cash transaction price. The futures contract for January closed at $3.39 on October 16.

Futures and spot general trends should be aligned but they are not.

Figure 2. Natural gas futures prices have increased +$0.93 (+51%) since September 22.
Price fell from -$0.11 from Monday’s high of $2.88 to $2.77 week ending October 16.
12-month spreads widened $0.18 (360%) from -$0.05 to -$0.23.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. natural gas comparative inventory fell -26 bcf to 309 bcf for the week ending October 9 (Figure 3). This was the second week in-a-row that C.I. has fallen.

This week’s C.I. vs Henry Hub spot price is shown by the yellow circle in Figure 3 . Last week’s data point is shown in light blue. 

C.I. vs Henry Hub price plots below the previous red yield curve for the week ending October 9. It is -$0.24 under-priced at $1.46 on the red yield curve and -$0.46 under-priced on the green yield curve.

Figure 3. C.I. vs Henry Hub price plots below the previous red yield curve week ending October 9.
It is -$0.24 under-priced at $1.46 on the red yield curve
and -$0.46 under-priced on the green yield curve.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. natural gas storage remains higher than 2016 record-high levels for the ninth week in-a-row (Figure 4). Storage decreased to +309 bcf more than 5-year average and moved down to +358 bcf more than a year ago for the week ending October 9. The addition of +46 bcf was -26 bcf smaller-than-average for this date.

Figure 4. U.S. natural gas storage fell to +309 bcf more than 5-year average
and moved down to 358 bcf more than a year ago week ending October 9.
Addition of 46 bcf was -26 bcf smaller-than-average for this date.
Source: EIA and Labyrinth Consulting Services, Inc.

Natural gas comparative inventory is at the lowest level since the week ending June 12 (figure 5).

Figure 5. Natural gas comparative inventory fell for second week in-a-row.
C.I. decreased -26 bcf to +3096 bcf week ending October 9.
Lowest level since mid-June.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. temperatures are expected to be twice as warm as last year and 69% warmer than the norm for the week ending October 16 (Figure 6). The week ending October 9 was 13% cooler than last year but 18% warmer than the norm.

Figure 6. U.S. temperatures are expected to be twice as warm as last year
and 69% warmer than the norm week ending October 16.
Week ending October 9 was 13% cooler than last year but 18% warmer than the norm.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply and Demand

Natural gas consumption fell +2.2 bcf/d to 62.1 bcf/d for the week ending October 9 (Figure 7). Residential-commercial use fell -2.2 bcf/d after surging +4.4 bcf/d last week. LNG pipeline receipts fell -0.7 bcf/d after increasing +0.8 bcf/d last week.

Figure 7. Natural gas consumption fell +2.2 bcf/d to 62.1 bcf/d week ending October 9.
Residential-commercial use fell -2.2 bcf/d after surging +4.4 bcf/d last week.
LNG pipeline receipts fell -0.7 bcf/d after increasing +0.8 bcf/d last week.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply decreased -1.6 bcf/d and demand decreased -2.7 bcf/d as the surge in residential-commercial space heating last week subsided with more normal weather in the northern part of the country (Figure 8). Dry gas production fell -1.2 bcf/d from 87.1 bcf/d last week to 85.9 bcf/d for the week ending October 9. Some of this was because U.S. oil production fell from 11 to 10.5 mmb/d with lower associated gas output. Canada gas imports fell -0.3 bcf/d to 4 bcf/d.

The supply-demand balance was +8.7 bcf/d for the week ending October 9. That was -3.2 bcf/d less than the +11.9 bcf/d 5-year average surplus for October. This lower-than-normal supply surplus may be part of the reason for higher prices.

Figure 8. The supply-demand balance was +8.7 bcf/d week ending October 9.
That was -3.2 bcf/d less than the +11.9 bcf/d 5-year average surplus for October.
Source: EIA and Labyrinth Consulting Services, Inc.

Discussion

Nothing about natural gas markets is normal right now. They have been on a roller coaster of price discovery excursions since April. Mid-October prices are higher than peak levels last winter. Spot and futures prices are largely disconnected.

Futures prices fell from a November 2019 high of $2.86 to $1.55 by early April (Figure 9). That was normal. The three price discovery excursions that followed during the Spring and Summer fill season were not normal. These departures can be explained but their magnitude cannot.

Figure 9. Natural gas markets on a roller coaster of price discovery excursions since April.
October prices were higher than peak levels last winter.
Source: Quandl and Labyrinth Consulting Services, Inc.

I can find no measure of supply, demand or storage that accounts for observed price fluctuations. Storage is at record levels. That should mean lower not higher prices. The supply-demand balance has been lower than the five-year average in October but does not signal supply urgency. Comparative inventory has fallen for two weeks but is far above levels that should indicate higher prices.

The only explanation is uncertainty. The pandemic and economic depression have put everything into question. Oil and gas production cannot be maintained with rig counts at record low levels. Companies have limited capital and cannot drill more wells from cash flow. Investors have sent the strongest signals possible that they want to see fiscal discipline before returning with cash. Fossil energy has never been more out-of-favor in world opinion.

Yet the economy cannot function much less grow without energy. The result is a heightened sensitivity to otherwise ordinary events. I see little chance that this will change until we get through winter heating season. If supply proves adequate, as I believe it will, price discovery will end or modulate. If not, markets will continue to use price leverage to increase supply.

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