Key Points: Bloomberg scrapes show us that natural gas field production was slightly tighter this week. Forecasts of warm weather for the next two weeks have caused a decline in gas prices. Average imports from Canada have increased marginally from 5.02 billion cubic feet per day (Bcf/d) last week to 5.41 Bcf/d this week. Mexico exports remained stable.
Our analysis leads us to expect the EIA to report later this week that there was a 120 Bcf withdrawal for the week ended Friday, Dec. 14 (lower than the current 139 Bcf consensus withdrawal expectation and lower than the 134 Bcf five-year average withdrawal).
The supply-demand balance in natural gas markets has been thin in 2018. As the year draws to a close, even the 8 Bcf/d production gain year-on-year has not been sufficient to keep up with demand and exports. This has subsequently left little buffer in the storage inventory.
As we outline below, there are several neutral or negative drivers for prices this week, which colors our view of what is happening to gas prices.
Average field supply has reduced slightly for two weeks in a row. We think this trend will continue as we enter the holiday season. The weekly average dry gas production dropped to 84.43 Bcf/d compared to the 30-day average of about 86 Bcf/d. There were no freeze-offs, delayed LNG import deliveries or any major disruptions for the report week. Therefore, we anticipate that supply will likely be a positive driver for price activity.
Natural gas markets have always been dependent on weather. But this winter, weather has had a more pronounced effect on prices as volatility has become the new normal. Reports of warm weather for the next two weeks across the U.S. have caused natural gas prices to sink rapidly. Prices are declining despite low gas inventories. Spot intraday prices at press time of our report last week was at $4.49/MMBtu. Intraday prices as of press time today are at $3.71/MMBtu. Accordingly, we expect weather to offer negative headwinds to this week’s price activity.
Trader Sentiment: Negative
The CFTC’s Dec. 14 commitments of traders report for NYMEX natural gas futures and options showed that reportable financial positions (Managed Money and Other) on Dec. 11 were 18,524 net long, and overall net long decline this week follows a net gain last week. Accordingly, we expect Trader Sentiment to be a negative driver for price activity.
We estimate a storage withdrawal of 120 Bcf will be reported by EIA this week for the week ended Dec. 14. In our prior forecast, we estimated a gas withdrawal of 91 Bcf for the week ended Dec. 7, which was at that time 9 Bcf lesser than the consensus estimate. Directionally we were correct vs. consensus in that the EIA’s actual reported value was 77 Bcf. For this week, our 120 Bcf withdrawal expectation is lower than the five-year average value of 134 Bcf for the same week and is also below the current consensus of 139 Bcf. With lower than normal withdrawals, we expect storage changes to have a negative impact on price action.
We see a net neutral effect for structural demand side drivers. The overall demand has increased by almost 4 Bcf/d when compared to last week. While we see no near-term positive or negative structural factors, a longer-term indicator can be seen related to wind energy. Massachusetts held a $135 million auction for offshore wind farm rights in. Once established, the wind farm should be able to generate 1.6 GW of energy, which will reduce natural gas demand in Massachusetts and neighboring states.
We see flows as a neutral driver this week for gas prices. There were no freeze-offs and no new upset conditions for the week ended Dec. 14. However, in the current week (which will be reported by the EIA next week), we note a pipeline rupture of a 22-inch natural gas line owned by Spectra Energy in Tennessee. We think it is not likely to have a material effect.