Does Natural Gas Truly Have A Supply Problem? (Part 2)

In our previous blog post, we looked at the supply/demand situation in the natural gas market in order to assess the risk of heading into the upcoming winter with storage levels that could prove to be inadequate in the event of a colder winter. We will take another look here, as we have had a couple of EIA reports to digest since that post. Last week's report showed a build of 76 bcf for the prior week, not as tight, supply/demand balance-wise, but not inherently bearish. Then, we were hit with another big bullish surprise in yesterday's report, showing a build of just 16 bcf for last week.

This was well under our estimate, and below just about every market estimate we saw heading into the report. Now, there were a couple of issues that combined to strengthen this report, namely, lower production last week, and very low wind generation, but even with those in mind, it was a strong number, and prices have responded by rising roughly 10 cents since the report.

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These are, of course, the highest prompt month prices we have seen at this time of year since 2014, yet the higher prices have, so far, done nothing to weaken the supply/demand balance, as one would typically expect to see. The following chart shows recent injections compared to the same weeks in 2018 to 2020. Notice this year's trend line remains well under the prior three years, indicating that, weather adjusted, injections continue to be significantly smaller this year, which is remarkable given the gains in flat price.

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On average, per this chart, we are injecting roughly 3 bcf / day less than the 2018 to 2020 average, weather adjusted, over the last few weeks. Some simple math reveals that such a pace, should it continue, would lead to end-of-season storage levels around 3,230 bcf, easily lower than what the market would be comfortable with. Even loosening the balance to match the prior three years would only get storage to just over 3,600 bcf, still the lowest end-of-injection-season level in the last several years, outside of 2018.

Where would such loosening come from? It all still hinges mostly on production, in our view. We still have yet to see any material gains since late February, when averaged out.

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Now, we do typically see production increases from July through the start of winter. As such, we can use the prior three years as a sort of "measuring stick". The following chart shows that, on average, we have gained roughly 4 bcf / day in production from now through the end of November in the last three years.

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With LNG exports likely staying "maxed out", or close to it, given the natural gas situation globally, and Mexican exports elevated vs prior years, production needs to make similar gains this year. If that does not occur, any cold this winter would make things very, very interesting.

Speaking of weather, continued anomalous heat the rest of summer would further exacerbate the need for more supply to keep storage levels in check, though forecasts have cooled somewhat, recently, as the projected total for Gas-Weighted Degree Days (GWDDs) for July as a whole has slipped a little under the 5-year average.

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That is not "wildly bearish" by any means, especially since it has come with lower wind generation, but has moved weather to more or less a "neutral" factor, for now.