Natural Gas Storage
Posted: Mon Dec 12, 2016 1:32 pm
Comments below from Adam Longson, CFA, CPA – Morgan Stanley
Bullish scenario setting up for gas in the second half of Dec. January NYMEX gas prices
gained 9% last week, pushing total gains for the past four week period to $1.13/MMbtu, with
prices now trading at YTD highs. Gas bulls received an early Christmas gift last week as the
two week weather outlook moved dramatically colder as an arctic air mass is expected to move
in and push temperatures in over half the US to below normal levels, with the most extreme
cold being seen in the Midwest and Northeast. Given these important weather changes, not
only will US storage levels fall to a YoY deficit in this week’s storage report, but it is possible
we will see record setting draws and deficits to the 5-yr average by month end.
Move over polar vortex, make way for the Siberian Express. Weather forecasts saw large scale
changes midweek last week as American operational models indicated a ridge bridge
from Alaska to Siberia set up transporting the Siberian Arctic Express cross polar and into
North America. While these types of air masses were popular in the 1970’s, and was
responsible for the cold outbreak in Feb 2015, they can do similar damage than the Polar
Vortex events from the 2013/2014 winters. Depending on the intensity, a Siberian Express
event can pose greater issues for gas storage than a Polar Vortex as it is known to bring arctic
air to a higher percentage of the US at the same time.
Why we think this cold is setting up max bullish for gas storage. As we pointed out two
weeks ago (see The Commodity Manual), the most bullish setup for gas withdrawals this
winter would have come from extreme cold in the second half of December as the same period
last winter felt the most extreme warmth vs normal. Not only is this setup looking to take place,
but the most extreme cold is forecast in the heaviest gas consuming regions of the Midwest
and Northeast. These two regions have accounted for 62% of total US residential/commercial
demand across the previous five winter seasons on average.
Storage could now push below average before month end. Current forecasts place
cumulative HDDs in the coming three weeks 7% higher than normal and 53% higher than the
same period last year. Similarly, storage withdrawal projections include two 200+ Bcf draws
and a cumulative 611 Bcf draw through the Dec 23, 482 Bcf more than the equivalent 2015
period and 351 Bcf more than 5-yr average draws. With this outlook, total inventories should
move from a surplus as of Dec 2 to a YoY deficit this week’s report (week ending Dec 9) and a
deficit to the 5-yr average by Dec 23.
MY TAKE: As I said in this weekend's podcast, if natural gas storage falls below the 5-year average by the end of December, we should see a significant move higher for gas prices. Over the last ten years, storage levels have dipped below the 5-year average three times. Those dips all caused natural gas prices to spike to over $6.00/MMBtu.
Bullish scenario setting up for gas in the second half of Dec. January NYMEX gas prices
gained 9% last week, pushing total gains for the past four week period to $1.13/MMbtu, with
prices now trading at YTD highs. Gas bulls received an early Christmas gift last week as the
two week weather outlook moved dramatically colder as an arctic air mass is expected to move
in and push temperatures in over half the US to below normal levels, with the most extreme
cold being seen in the Midwest and Northeast. Given these important weather changes, not
only will US storage levels fall to a YoY deficit in this week’s storage report, but it is possible
we will see record setting draws and deficits to the 5-yr average by month end.
Move over polar vortex, make way for the Siberian Express. Weather forecasts saw large scale
changes midweek last week as American operational models indicated a ridge bridge
from Alaska to Siberia set up transporting the Siberian Arctic Express cross polar and into
North America. While these types of air masses were popular in the 1970’s, and was
responsible for the cold outbreak in Feb 2015, they can do similar damage than the Polar
Vortex events from the 2013/2014 winters. Depending on the intensity, a Siberian Express
event can pose greater issues for gas storage than a Polar Vortex as it is known to bring arctic
air to a higher percentage of the US at the same time.
Why we think this cold is setting up max bullish for gas storage. As we pointed out two
weeks ago (see The Commodity Manual), the most bullish setup for gas withdrawals this
winter would have come from extreme cold in the second half of December as the same period
last winter felt the most extreme warmth vs normal. Not only is this setup looking to take place,
but the most extreme cold is forecast in the heaviest gas consuming regions of the Midwest
and Northeast. These two regions have accounted for 62% of total US residential/commercial
demand across the previous five winter seasons on average.
Storage could now push below average before month end. Current forecasts place
cumulative HDDs in the coming three weeks 7% higher than normal and 53% higher than the
same period last year. Similarly, storage withdrawal projections include two 200+ Bcf draws
and a cumulative 611 Bcf draw through the Dec 23, 482 Bcf more than the equivalent 2015
period and 351 Bcf more than 5-yr average draws. With this outlook, total inventories should
move from a surplus as of Dec 2 to a YoY deficit this week’s report (week ending Dec 9) and a
deficit to the 5-yr average by Dec 23.
MY TAKE: As I said in this weekend's podcast, if natural gas storage falls below the 5-year average by the end of December, we should see a significant move higher for gas prices. Over the last ten years, storage levels have dipped below the 5-year average three times. Those dips all caused natural gas prices to spike to over $6.00/MMBtu.