Gas Glut?

Jim Brown
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Based on the drop in natural gas prices you would think there was a glut of natural gas. That is definitely not the case and somebody is going to get burned if we have another cold winter.

Natural gas prices have declined to support at $3.80 and could easily dip below that level based on the chart. Resistance at $4.00 has been firm.

Goldman Sachs (GS) just cut their forecast for gas price averages for Q4 and throughout 2015 from $4.25 to $4.00. Last winter the Polar Vortex pushed gas supplies to dangerously low levels and prices up to multiyear highs. Not since 2008 had gas prices risen to $6.50.

Gas inventories in storage had declined to only 800 Bcf and an 11 year low. The rebound in gas in storage has been remarkable thanks to a mild summer and a lot of rain in the Midwest. However, at the current rate we will enter the 2014 winter with gas inventories at the lowest level since 2008. Gas in storage is -12% below 2013 levels and -13% below the five-year average. That is the biggest deficit since 2005.

On the surface it would appear that we should expect higher gas prices this winter rather than lower prices. The futures spread between October gas futures and January gas futures is the lowest since the year 2000. This would appear to indicate that traders believe there is enough gas in storage and there will not be a shortage as there was last winter.

However, AccuWeather and Commodity Weather Group are currently predicting another winter of below-normal temperatures.

I believe traders are being confused by the record temperatures all over the world in August. After a Polar Vortex winter we just endured the third hottest summer on record. Only 1998 and 2010 were hotter. For those global warming doubters out there the hottest six years on record all happened since 1998, which was the hottest year on record. (1998, 2003, 2005, 2010, 2013, 2014 but not in that order). Note in the global map below the big blue cloud over the U.S. this summer that kept much of our temperatures in the "much cooler than average" category. Indiana and Arkansas had their coolest July on record. This allowed us to rebuild the gas in storage at a record rate.

Ponder this. 2013 and 2014 are both in the top 6 warmest years but the Polar Vortex was last winter. Super hot to super cold and forecasters are predicting another colder than normal winter.

Another factor that could impact storage is the rising industrial demand and higher exports. The EIA says consumption should rise +1.8% to 72.6 Bcf per day. Exports to Mexico are up +13% over year ago levels with 65 Bcf exported to Mexico in June. More than 49% of U.S. households heat their homes with gas. We are adding about 450,000 new gas heated homes per year. Utility companies are being pushed away from cheaper coal because of new EPA regulations.

We are setting up for a real gas crunch despite the rise in production from the Marcellus, up +1.4% to 16.1 Bcfd, and Utica Shale +5.6% to 1.5 Bcfd. Add in the associated gas produced from the thousands of shale wells producing both gas and oil and supply is rising but just not rising fast enough.

Not all analysts believe gas futures will average $4 like Goldman. Barclays did reduce their forecast from $4.55 to $4.30 and Citigroup cut their estimates from $4.90 to $4.70.

All of these estimates will be too low if we really do get another cold winter. Today the gas in storage is still 400 Bcf below year ago levels and we almost ran out of gas last year.

We added 90 Bcf of gas to storage last week and the second highest injection in the last two months thanks to the cool weather. If the cooler than average summer/fall weather is a prelude to another cold winter then those gas supplies are going to disappear just as quickly as they rose over the summer.

I would view any decline in gas prices under $3.72 as a buying opportunity for March natural gas futures or the natural gas ETF (UNG). A dip to $3.50 on further large injections would be a gift for speculators.

Oil Inventories

Crude oil inventories rose +3.7 million barrels to 362.3 million. This was the first gain in five weeks. From this point forward we should see inventory builds as refineries take processes offline for maintenance and to shift to winter blends. As we head into mid November the trend will shift to declines as refiners reduce oil on hand to avoid paying property taxes on it at year end.

Oil inventories rose exactly as expected according to the inventory chart below. The red line exactly mirrored the five year trend.

Oil production jumped 248,000 barrels a day to 8.84 million and the highest level since 1986, according to the EIA.

Refinery utilization declined about 1% to 93% but products supplied to the market rose to 19.75 million barrels per day and the most in six weeks. Refiner inputs were flat at 16.3 mbpd.

Imports surged to 8.11 mbpd, a jump of +493,000 bpd, and the most in three months. Cushing inventories declined slightly to 20.0 million barrels.

Distillate inventories rose +300,000 barrels to 127.8 million and a three month high. It was surprising to see a gain with distillate demand spiking +427,000 bpd. Imports rose +73,000 bpd.

Gasoline inventories declined -1.6 million barrels to 210.7 million. Production increased +209,000 bpd despite the decline in refinery utilization. Imports were flat at 327,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.

Propane inventories rose 1.39 million barrels to 77.44 million. That was a snap back from the first decline since spring in the prior week. Inventories are at the highest level since October 1998. Obviously the recent cold weather has prompted the start of the fall fill up process for homeowners. Demand declined slightly from 1,350,000 bpd to 1,104,000 bpd.

Natural gas inventories rose +90 Bcf to 2,891 bcf. Inventories are still -13.3% below the five year average at 3,335 Bcf. There are only 6 weeks left in the injection season and at the current rate we may only reach 3,250 Bcf. That is still about 600 Bcf below where we need to be going into the heating season.

The blue line in the chart below shows the current inventory relative to the five year average.

This has been a very calm hurricane season and the normal season peak was two weeks ago. That does not mean the risk is over but it will diminish from here. There are no storms or potential storms in the long term forecast.


The S&P futures are down hard at -9.50 Sunday night and WTI futures are down slightly at $92. Geopolitical headlines may be the cause today but the market internals were weakening going into Friday's close. The market was setting up for a volatility event and this may be it.

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Jim Brown

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