Market Newsletter – November 2019November 01, 2019
The celebration of Thanksgiving is a pivotal moment in America; while there is plenty of societal consternation regarding its history and evolving messaging, it exists as an opportunity to evaluate our daily lives and engage in community and gratitude. As we transition to the arrival of peak season in the natural gas market, there is an abundance of both existing supply and forthcoming demand, so it too should be viewed as a fulcrum of sorts in several ways.
Firstly, underground natural gas storage will have reached its highest levels of the year at this point, as the injection season has officially come to an end per EIA reporting data for the week ending Nov. 8th. Heading into peak season last year, there were grave concerns about the levels of working underground storage (~17% deficit to 5-year average) that led to extreme volatility in late November and early January. Today, there are very few concerns about natural gas stockpiles (3,638 bcf) as production is now at an all-time high, and while we expect Lower 48 gas production to fall in Q1 2020 (March), this bodes bearishly for prices going forward.
Secondly, peak season also signifies the beginning of peak demand season, driven by a gradual increase in heating demand and corresponding increases in the accumulation of heating degree days (HDDs). Increased heating demand has a more profound impact on withdrawals than ever before, as the commodity has continually earned a larger share as a fuel source of the electricity generation mix. In fact, the commodity’s relatively low price throughout the past two years has launched natural gas’ share of domestic electricity generation to 37%, up significantly from 25% in 2011. The first withdrawal (when overall demand outweighs supply/production) of the season was reported for the week ending Nov. 15th (94 bcf), and while that is a substantial initial withdrawal on the heels of elevated demand levels in mid-November, the price has still failed to reach the $3 mark. Considering that overall, this November has been equally cold when compared to last November, this further underpins the bearish market sentiment. It will take a major cold front to have any significant bullish impact on the market as we move into December.
Finally, this time of the year is traditionally associated with marked volatility, with both the potential for extreme highs and lows (historically speaking), a high degree of weather-sensitivity (both to existing and forecasted events), and especially so as it pertains to extreme weather events. There is more than a trivial chance that this winter will be colder than the “most-likely” forecasts that are currently in place, which could very quickly push the commodity over the $3 mark. Presently, January looks to be the most likely timeframe for the arrival of extreme price volatility and any unhedged exposure is best addressed in the coming weeks. Significant consecutive withdrawals during Jan-Feb would quickly put the bulls back in control if a deficit begins to appear and expand. That said, the critical piece of the weather equation today is the short-term outlook. While the first week of December is expected to be much colder than normal, national holidays typically lead to losses of industrial and commercial demand, which should offset any gains from increased heating demand. If forecasts turn warmer, look for markets to head lower after Thanksgiving – I expect opportunities to lock in historically-low long-term natural gas and electricity supply contracts to persist throughout much of December.
Wishing you and your families a safe and warm Happy Thanksgiving.