Market Newsletter – September 2018September 01, 2018
At last glance, we were in the midst of a month-long market run-up as several heat waves ripped through major demand centers across the country with no apparent certainty as to when they might subside. That uncertainty was quickly wiped out with the arrival of some major storm systems that brought sustained cooler air into the northeast and southwest during the beginning of September, and of course, Hurricane Florence has brought reductions in demand of its own (power outages, decreased cooling demand) and will continue to do so over the next few weeks. The extent to which Florence will interrupt production remains to be seen, but historically speaking, we have seen minor interruptions in production as a result of catastrophic weather. The hope is that the impact to the people and economies in areas most at risk is minimal.
With that said, September has been one seemingly continuous market slide resultant of decreased demand and increasing production, bringing prices to their knees and at levels we haven’t witnessed since late July. As of today, the natural gas spot market is trading around
$2.80 while calendar strips for 2020 and 2021 are trading around $2.60. Market conditions are ripe for anyone considering going long on their subsequent supply agreement, though it is very unclear how long that might remain the case.
Since the end of April, aggregate temperatures have been warmer than normal for the country as a whole, week-after-week, and month-after-month. From April 28 to September 1 cooling degree days totalled 22.9 percent more than normal, meaning conditions were significantly warmer than normal. This is also largely the reason for the existing substantial natural gas storage deficit heading into winter. Regardless of which winter weather prediction you take stock in (some call for teeth chattering cold, while others call for above average temps), the fact remains that at 2,636 Bcf, total working gas is below the five-year historical range. Over the past five years, storage levels have peaked in the week ending November 9 at around 3,800 Bcf. What this translates to is that there are nine more weeks remaining in injection season to make up the deficit before withdrawal season sets in. Projections for the next two-three weeks call for no real reduction in the deficit, meaning those final six weeks of injection season will need to average around 200 Bcf to bridge the gap (or three times the average injection we’ve been seeing). Those levels are largely unattainable, and this year’s storage is expected to peak at 3,300 Bcf, which would be the lowest level to start heating/withdrawal season since 2005. Going into this winter, natural gas prices will be on thin ice, so to speak. Stay tuned.