Diminishing need for ngas storage - interesting article

[cmm3rd]

From Financial Post (Canada), this article explains a relatively recent, and very significant, trend change in how natural gas is supplied to the market, with very disruptive consequences. Fwiw, I have heard this echoed by someone who has been around the energy industry for a long time. Not mentioned is that largely as a result of the advances discussed (and increasing global demand), US export capacity of LNG is expanding exponentially, contributing significantly to demand.

https://business.financialpost.com/comm ... ments-area

Charts are excellent.

Snippets:

And now ladies and gentlemen, for natural gas’s final trick… look, no storage!
The transition of North American natural gas from a high-cost, volatile-priced commodity to one that’s cheap and relatively stable has been remarkable. And it’s all happened in less than a decade.

But the gaseous fuel has performed a final act, convincingly unveiling its latest feat this year: the diminishing need to store the product.
... Prices would strengthen every time volumes held in storage caverns would fall below the closely watched five-year average. Then, a simultaneous cold-snap on the East Coast would call keyboard-happy gas traders into action, driving up prices further.

Now, the weekly storage report elicits a big yawn. Recently, the collective volume of natural gas in caverns and holding vessels dropped to a 15-year low, “off the charts” as is proverbially said (see Figure 2). Nothing happened despite record demand. In fact, last week, the price of gas remained steady even with a hurricane blowing through the gas-rich Gulf of Mexico (another event that would have historically caused a price spike).

[dan_s]

The amount of our gas supply coming from the Gulf of Mexico has dropped from over 30% to ~6%, so hurricanes are not the threat to supply that they once were.

So, what happens when a Polar Vortex moves into Ohio/PA and causes gas wells to freeze off?

We are in the "Shoulder Season" when there is plenty of gas. Utility companies never worry about having enough gas in September. The 'squirrels' may have wish they had stored more nuts when Old Man Winter comes knocking.

[cmm3rd]

From today's Nat gas storage report:

Working gas in storage was 2,636 Bcf as of Friday, September 7, 2018, according to EIA estimates. This represents a net increase of 69 Bcf from the previous week. Stocks were 662 Bcf less than last year at this time and 596 Bcf below the five-year average of 3,232 Bcf. At 2,636 Bcf, total working gas is below the five-year historical range.

Nat gas as I write: 2.848 +.019 (yawn)

The squirrels are counting on additional takeaway capacity and, if needed, DUC completions (between now and winter's arrival) to create enough additional flowing gas to get us through any polar vortex. Not saying they're right, but that's apparently what they believe, as reflected in the price of ngas.

[dan_s]

Tell us your estimate on how many DUCs need to be completed and tied into gathering systems to make up for a ~600 Bcf deficit in storage.

Assume that the average Marcellus/Utica well comes online making 10 MMcf per day. This is simple math, but very big numbers.

[cmm3rd]

I'm not arguing that the "squirrels" are right; instead, just trying to find (and understand, whether correct or not) an explanation for why the price of gas has not responded to historically low inventory numbers this close to withdrawal season (or, as you have said, after Labor Day). If I understand the explanation, I can then evaluate whether I agree with it and base my investment decisions accordingly.

Here's another person's musings:

I'm not sure I agree with the idea that DUCs will replace storage. One major problem is the deliverability is in the wrong place - many storage fields are in the Midwest, in areas that are close to demand. The DUCs are at the far end of the pipeline, and will be constrained by the pipeline capacity to get to market. The driver has been the historical capacity of the system, with the extra gas going into storage in the summer, to be produced in the winter. If the pipelines constrain the delivery of natural gas during high demand during a cold streak, the DUCs can't produce more than the pipeline capacity. Also, the flowback of frac fluid has to be timed to get to the peak production rates - it is not instantaneous.

I wonder if we are just not seeing a market phenomena where storage is being drawn down, because no one wants to pay to store the gas. I wonder if the timing of Atlantic Sunrise and a few other projects are "flooding" the market, but once that is back to normal, the market dynamics would revert to normal. Just not seeing a spike in NG storage as these pipelines are going in service. One data point that strikes me is that COG, RRC and EQT are not talking about saving DUCs to take the place of NG storage. That seems odd to me that the big NG operators are not talking about doing this, in place of a hedging strategy.

[ddlopata084]

CelsiusEnergy.net runs a nice site, unfortunately his commentary is now subscription, as of just the last 2 weeks. But prior to becoming subscription, it was free most days (except Wednesdays) and very interesting to read the commentary and thinking of an oil and gas trader. His running commentary has been about how loose the gas supply/demand situation is right now, compared to history (forget about storage relative to 5-year, etc). The market has run anywhere from 2-8 BCF/day loose all summer, if you extract out temperature delta to mean (it was a hot summer). And more gas supply is coming online with additional avenues to market (Rover, Atlantic Sunrise, etc). So he, as a gas trader, is near-term bearish. Perhaps this expresses the sentiment of most traders at this time. So let's say the market is 5-8 BCF/day loose. Over the coming shoulder season if temps are normal, perhaps alot of the gap to 5 year gets closed? And perhaps the market becomes even looser as Rover goes to full volume (up to 2.8 BCF/day now and growing toward 3.1, 1 year ago it was less than 1 BCF/d) and Atlantic Sunrise real close to being commissioned....

Not saying this is the right view, but perhaps one idea on how the market is thinking, and why there has been no rush to fill storage. If the market is wrong, the winter is cold, etc - then gas prices explode, at least at certain city gates, etc...

[dan_s]

If the U.S. natural gas market was 5-8 Bcfpd "looser" than normal then storage would be WAY UP not WAY DOWN. If there is that much gas supply over demand then where is going?

When gas production exceeds demand it goes into storage.

> Demand for power generation is way up
> Industrial demand for power and feed stock is way up
> Exports continue to rise (pipelines to Mexico and Eastern Canada and as LNG)

Let me just remind all of you that this is not a "just in time" industry. New wells are never drilled, completed and tied into a gathering system in a few days. The logistics that need to be worked out for an effort to complete hundreds of DUC wells are incredible. For example, it now takes 100 train cars full of frac sand to complete one horizontal well. Are there dozens of completion crews & equipment sitting around in Ohio and PA just waiting to run out to the field?

BTW if you think there is going to be a massive increase in well completion activity very soon in the Marcellus/Utica, you should be loading up on Hi-Crush (HCLP). They are the #1 supplier of frac sand in that area with the best deliver system.

[ddlopata084]

Dan - his definition of looser excludes temperature delta to the norm, and therefore excludes excess power generation use of natural gas during the summer to meet cooling needs that are beyond long-term averages. So he claims that if this summer were “normal,” one hell of a lot more gas would have gone into storage. I know you’re aware of his site, so if you go to the natural gas page you can see what the thinking is. Agree or disagree with his thinking, to me he has supplied the most cogent thinking about the gas market fundamentals that I have seen. And clearly, price is truth, for now. And price truth agrees with his thesis, for now.

[ddlopata084]

For reference, here’s a clip from his natural gas page:

While all elements of supply and demand are plotted here, those that are independent of temperature should be studied most closely. Under the assumption that, eventually, temperature will mean-revert and is only responsible for short-term deviations from baseline demand, it is the temperature-independent variables that truly drive supply/demand balance over months to years. These include domestic production, LNG imports and exports, Canadian imports, and Mexican export. I attempt to adjust temperature-dependent variables including res/com demand and powerburn based on a 10-week weighted average normalized to mean temperatures, which is reflected in the figures to the right.

[ddlopata084]

For those that are interested, here’s a link to the page. It’s a nice opportunity to learn how a long-term energy trader analyzes the market :

http://www.celsiusenergy.net/p/natural- ... emand.html