6:00 AM EDT, Friday, March 3, 2017
In its weekly Natural Gas Storage Report for the week of February 18-24, the EIA announced on Thursday morning that inventories climbed by +7 BCF. The reported injection was 5 BCF larger than my +2 BCF projected build and 11 BCF bearish versus the -4 BCF analyst consensus. See my historical projections page HERE for more details. The weekly storage build was the first ever during the month of February, the earliest on record beating the previous record of March 16 by 3 weeks, and it occurred six weeks ahead of the first storage injection per the 5-year average. It was also a mammoth 139 BCF bearish versus the -132 BCF 5-year average withdrawal. As stated throughout the week, the build was driven by an unfortunate combination of record warmth, rising wind generation, and a 3-day holiday weekend that suppressed commercial and industrial demand.
Unsurprisingly, the storage build was led by the South Central Region where temperatures in the 60s, 70s, and 80s across most of the region throughout the week allowed 21 BCF to be injected into storage, a massive 58 BCF bearish versus the 5-year average -37 BCF draw, the worst performing of the five regions. In fact, it was the only region that saw a net weekly injection, although the remaining regions saw withdrawals that were well shy of their respective 5-year averages. The Northeast region had the largest withdrawal at -9 BCF (5-year average: -38 BCF) while the Midwest, Pacific, and Mountain regions saw miniscule withdrawals of -4 BCF, -1 BCF, and 0 BCF, respectively. With the +7 BCF injection, natural gas inventories rose to 2363 BCF and the storage surplus versus the 5-year average ballooned to +295 BCF or +14%. The surplus has grown by 374 BCF since reaching a -79 BCF storage deficit in late December and is the largest since September 9, 2016.
Through the first 15 weeks of the storage withdrawal season, inventories have shrunk by -1684 BCF since reaching a record high of 4047 BCF in November. This is the second largest 15-week withdrawal in the last 5 years, although it now trails first place 2013-2014 by 800 BCF and will likely drop to third place after next week’s Report. Furthermore, it has slid all the way to the 10th largest in the full 22 year period of EIA storage data from the third largest earlier in the winter. See more on seasonal withdrawals HERE.
Despite the exceptional bearishness of the report, if temperature were removed as a variable, natural gas supply/demand balance was 2.9 BCF/day tight versus the 5-year average. This is slightly less than the running 1-month average of 3.1 BCF/day tight, likely due to the Presidents’ Day Holiday.
See more on current Natural Gas Inventories HERE.
While the report came in more bearish than even already bearish expectations, natural gas recovered from some early post-report losses and finished nearly flat on the day, up less than a penny or 0.2% to $2.80/MMBTU, technically its third straight day of gains. This was likely a “buy the news” type of day as investors had already priced in an ugly Report and are now looking past it and tried to get in on the cheap. However, with the storage surplus likely to be pushing +400 BCF by next week, I calculate that natural gas is trading at a steep 7% overvaluation based on current inventories alone and a nearly 9% overvaluation versus its long-term 8-month average Fair Price, exacerbated by a steep contango. Crude oil, meanwhile, dropped with the broader market on Thursday, falling $1.22 or 2.3% to $52.61/barrel. It was a three week low despite the commodity trading near an 18-month high for much of the week, highlighting the low volatility and tight trading range in the sector.
Natural gas demand will finish the storage week at a 2-week high today as seasonally cool to chilly temperatures cover the densely-populated eastern third of the nation. Temperatures will drop a further 5F-10F across the Ohio Valley and Northeast today with highs 5F-15F colder than average regionwide. Cleveland, Oh will only reach the mid-20s today and, with a stiff northwest wind, is under a Lake Effect Snow Warning for 4-8 inches off of Lake Erie. Philadelphia and New York City will only reach the upper 30s today while Boston will only see the mid-30s. While such temperatures are only around 10F colder than average, it will be the coldest day across the region in over 2 weeks which will likely make things feel colder, especially after highs reached the 60s and 70s just two days ago. Elsewhere across the nation, high temperatures will generally be within 5F of average with the possible exception of the central Plains where highs in the 60s from western Kansas to southern Nebraska will be around 10F warmer than average. Nonetheless, the nationwide temperature pattern will be driven by the cooldown across the East as the mean population-weighted nationwide temperature will fall another nearly 5F day-over-day to 43.3F, 2.7F colder than average. It is the first time in 2 weeks that we have seen a daily below-average nationwide temperature. It is also nearly a 15F cooldown in just 48 hours after temperatures topped out over 57F on Wednesday. Based on this outlook and early-cycle pipeline data, I am projecting a -20 BCF daily withdrawal, 1 BCF larger than the 5-year average -19 BCF daily withdrawal.
Despite the bullish daily draw today, it will not be enough to prevent another exceptionally bearish weekly withdrawal. For the week of February 25-March 3 ending today, I am projecting a preliminary -60 BCF weekly withdrawal, 76 BCF smaller than the 5-year average -136 BCF draw. While this is a significant improvement on last week’s +7 BCF build thanks to colder temperatures, it would still be the most bearish withdrawal in the last 5 years, 3 BCF smaller than last year’s -63 BCF draw–and 151 BCF smaller than 2015’s -211 BCF withdrawal which is the 5-year maximum draw. It would be the fourth consecutive week in which weekly withdrawals set a new 5-year bearish standard. Natural gas inventories would fall to 2303 BCF while the storage surplus would grow to +367 BCF, the largest since the week ending August 12, 2016. In addition to above-average temperatures, the weekly withdrawal was hurt by a slowdown in feedgas deliveries to the Sabine Pass LNG facility which dropped by 5.8 BCF from last week to just 9.5 BCF, the smallest weekly tally since mid-December. See more on this week’s projection on my dedicated storage page HERE.
Looking ahead to next week, the week will get off to a fast start with a projected -21 BCF daily withdrawal on Saturday versus the 5-year average of just -12 BCF as temperatures across the East remain cool to quite chilly. In particular, highs across New England will be 10F-20F below average with Boston only reaching the low 20s, the coldest high since early February. In fact, the current forecast high temperature of 21F would set a record low-maximum temperature for the date, one of the few times this winter we have talked about record cold in the Northeast. From there, however, things will go downhill in a hurry as warmth rapidly builds across the Great Plains. By Sunday, daily withdrawals will drop to near the 5-year average and by Monday could approach daily injections as 70 degree readings reach as far north as Minnesota. The mildest days of the week look to be Tuesday with mean population-weighted temperatures as high as 55F. While temperatures will cool towards the end of the week with daily withdrawals in the -5-10 BCF range, it will not be sufficient to cancel out the mid-week warmth. Projected daily withdrawals for the week are shown in the Figure to the right. For the week of March 4-10, I am projecting a preliminary -54 BCF withdrawal. While such a withdrawal would bring an end to the monthlong stretch of 5-year minimum withdrawals–2016 saw a mere -9 BCF for the week–it will still be the fifth consecutive weekly bearish withdrawal versus the 5-year average. Should it verify, the storage surplus versus the 5-year average would climb to +403 MMbbls, the largest since August 5, 2016. See more on next week’s projected withdrawal HERE.
In other news, the spring nuclear reactor maintenance season historically begins to kick into gear around this time. This is a 2-3 month period when nuclear powerplants are temporarily taken offline for inspection and fuel loading and natural gas substitution demand increases to make up for losses in nuclear generation. However, you wouldn’t know it by looking at current US nuclear output. As of Thursday, nuclear outages stood at just 257 GWh or 10.8% of total capacity. While such outages are just 5 GWh fewer than last year, they trail the 5-year average by a massive 133 GWh or 34% as shown in the Figure to the right. Off the 99 operational reactors, 78 are operating at full capacity, 12 at partial capacity, and a mere 9 are currently offline. This is negatively impacting natural gas demand, as substitution demand yesterday was just 2.1 BCF/day, 1.1 BCF less than the 5-year average. Through the first 6 days of the storage week, total substitution demand trails the 5-year average by 5.9 BCF. For 2017 to-date, substitution demand trails the 5-year average by a massive 35 BCF, contributing nearly 10% to the 400 BCF build in the natural gas surplus during this time. Nuclear power outages will become an increasingly important source of natural gas demand during the shoulder season in April and May so stay tuned. See more on my Nuclear Power Outages Page HERE.