Market Newsletter – December 2018December 01, 2018
We’re officially one month into the natural gas withdrawal season and we have already witnessed considerable inter-day and intra-day volatility in the energy markets – the likes of which we haven’t seen since the Polar Vortex of 2013-14, and prior to that, 2005 following Hurricane Katrina. It’s of particular note that each of these events were infinitely more drastic and catastrophic than a mere revision to short-term weather forecasts, highlighting this market’s strong and continued heightened sensitivity to weather. Nevertheless, the commodity’s price soared 18% in a single session ($4.837) on Nov. 14 only to come crashing down 17% the following day ($4.038). The extreme nature of that inter-day volatility suggests technical trading factors (short squeezes) were exacerbating the fundamental factors at play (a shift to colder than normal winter forecast vs. extremely low working underground storage levels). However, the upside price risk and the eventual determinants are by no means behind us. At the time of the largest price move in recent memory, working underground storage levels were right around 15% below levels for the same week last year, and a hair over 16% lower than the 5-year average for the same week.
As of today, that storage deficit has expanded in the four weeks since, and outside of a bearish short-term weather outlook that is pushing out to Dec. 26th, there haven’t been any major revisions to the long-term winter weather outlook. In fact, the major demand centers in the Northeast and upper Midwest are still projected to experience much colder than normal winters for most of January and February, which would put even greater pressure on the commodity if the storage deficit continues to expand during that timeframe. Should these colder-than-normal projections come to fruition, we could easily be looking at our current storage levels of 2.914 bcf (~20% below the 1-year and 5-year marks) reduced to around 800 bcf come mid-March, which would be the lowest mark since Katrina, when the price of natural gas ballooned to as much as $16. While that exact scenario is much more unlikely today with domestic production no longer isolated to one specific geographic part of the country (not to mention vast improvements and expansion in infrastructure), the most important facet to consider is the fallout of such a similar event and to consider that a supply deficit and its impact on price can only truly be negated by equally exceptional production.
Even with natural gas production continuing to set daily output records, the expansion of flatter demand verticals like increased gas-fired power generation (the price of which is increasingly correlated to natural gas for this reason), additional LNG exporting capabilities, and increasing industrial chemical demand, it will be a tall task to contract the storage deficit in the months (or years for that matter), that follow this upcoming winter. Is it possible to erase the current deficit? Entirely so, and highly likely – but the timeframe in which that will happen will continue to be the primary moving target going forward and the price of the commodity is likely going to remain elevated from the very consumer-friendly $3-level we have grown accustomed to over the past 3-4 years. As volatile as the commodity can be in a short amount of time, it can be just as stubborn for a much longer period. That shift from sustained $3 to sustained $5 could very well be right around the corner. For now, we’ll have to wait and see what 2019 winter has in store for storage.