Back to back winter storms sent natural gas demand to the highest level of the year and prices well over $4.
Gas demand rose sharply last week with a -162 Bcf decline in storage after a decline of only -13 Bcf the prior week. The demand for gas this week is going to rocket even higher as frigid weather covers most of the USA. Sub zero temperatures in the Midwest and well below freezing in the West, South and Northeast are going to increase demand even more this week.
Gas inventories are already -5.2% below year ago levels and -2.8% below the five-year average.
Analysts had already factored in a triple digit withdrawal from storage but the massive -162 Bcf number still shocked them and sent shorts running for cover. Gas prices rose to $4.16 and a six-month high. With the sub zero weather this week the inventory levels are going to take another significant hit.
With prices over $4 the number of active gas rigs surged to a three month high at 375. However, the very cold weather will cause a slowdown in drilling activity for both gas and oil. I had a son that worked in the gas fields in northwestern Wyoming. He said when all the liquids on the rigs begin to freeze the drilling activity comes to a halt. It takes some really cold weather to make that happen and overcome the drillers precautions but it does happen. With numbers well below zero in a dozen or more states this week you can bet that slowdown has occurred. While that will not affect injection rates this week it is a longer lasting impact on gas prices in general.
Coal demand is going to be soaring as well. Most gas plants have the capability to switch fuels from gas to coal as demand lowers pressure in the lines and increases the need for backup generators. Peabody is already projecting higher demand for coal this winter because the price of gas is well over the level where it is more economical to burn coal. That is in the $3.25 per Mcf range.
Crude prices appear to have slowed their ascent with WTI at $97.84 on Sunday night. After rising +$5 last week it is time for a rest. There is no fundamental reason for WTI to be this high today. Once the lower leg of the Keystone pipeline opens in January we will see the spread between Brent and WTI shrink but nobody knows how far. The unrest in Libya and shutdowns in Nigeria and Iraq are providing price support for Brent.
There are some analysts projecting WTI to test $85 but I think they are smoking something funny. The upward pull by Brent should keep WTI over $90 for the near future. If by some slim chance Iran upholds their agreement then we can revisit the price question six months from now and the outlook will be a lot different.
The indexes rallied on Friday but it was more of a short squeeze than an investor love fest. The expectations for a really strong Nonfarm Payroll number had pushed the markets lower and when that did not come to pass the shorts were forced to cover.
The next problems for the market will be the budget deadline next Friday and the FOMC meeting the following week. Other than that the rest of December is historically bullish.
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