The Risk Of A Warm Late Dec Is Likely To Move Some Capital To The Sidelines Until Jan

Dec 15, 2016


We won’t be surprised if some natural gas capital moves to the sidelines until the new year.  If so, it will be in the face of strong demand trends (exports to Mexico, LNG exports, industrial demand) for non-weather related natural gas in 2017 to 2020.  Rather it will be done because winter natural gas prices are primarily weather and weather sentiment driven, and the math for winter storage withdraws starts to play an even bigger role as we move thru the peak Dec/Jan/Feb months for natural gas demand.   Dec is the first of the big winter peak demand months, so if gets warm for the last 7 to 10 days in Dec, it gets tougher for the remaining winter period to reduce storage to levels to support a ~$3.40 2017 HH price.

Natural gas has attracted capital with positive demand trends and the expectation of a near normal winter.  There were mixed winter calls going into the winter, but most seemed to be calling for a near normal winter.  Henry Hub (HH) gas prices have pulled back from last week’s high of ~$3.80, but are still strong at ~$3.40, which is up >60% since the ~$2.10 in early Nov.  Perhaps more important, the 2017 HH strips are still ~$3.40.  Switching back to coal is expected as it typically happens with >$3 gas prices.  Rather, investors are also being attracted to the strong demand trends for natural gas.  Readers of our Energy Tidbits and blogs [LINK] know of our view that natural gas is strong to 2020 from multiple positive demand trends impacting 2017 to 2020 demand that are not weather related.  These include increasing gas exports via pipeline to Mexico, increasing gas exports via LNG, and increasing industrial demand from projects using natural gas as feedstock.  Bentek Energy (one of the leading US energy analytics groups [LINK]) has recently estimated current YoY increases in demand of ~0.6 bcf/d for Mexico, ~1.3 bcf/d for LNG, and ~1.3 bcf/d for industrial.

It was near record warm temperatures in Oct and Nov, makes Dec a more critical weather month.  The big move in natural gas prices was despite it being very warm in Oct and Nov.  NOAA reported that US had its 3rd warmest Oct in the last 122 years [LINK] and its 2nd warmest Nov in the last 122 years [LINK].  Oct and Nov typically represent 21% of the winter heating degree days, so aren’t critical to winter natural gas markets.  However, being behind in Oct and Nov makes Dec a more critical month for natural gas.  We created the below table from the American Gas Association heating degree days (HDDs) data [LINK] to show the distribution of HDDs by winter month.

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The good news is that Dec, Jan and Feb residential/commercial demand are each normally equal to Oct + Nov demand.  Oct and Nov can be very significant to get the winter off to a great start for natural gas demand.  That wasn’t the case this year.  Fortunately for natural gas,  Dec, Jan and Feb are each significantly more important to natural gas markets.  Each of these month’s residential/commercial demand is normally equal to the combined Oct + Nov months.  We created the below table from the EIA’s Natural Gas Monthly [LINK]  historical data to show the residential/commercial natural gas demand by month.   We chose residential/commercial, as opposed to total natural gas demand, as residential/commercial demand account for the vast majority of volatility in winter demand.   It shows residential/commercial demand can swing by 14 bcf/d (400 bcf) in a specific month.

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Dec is off to a good start for storage withdraws, It was a big 147 bcf storage withdraw today.  Today, the EIA reported natural gas storage data for the week ended Dec 9 [LINK].  The HDDs were 41% higher than last year so, which led to a very big 147 bcf storage withdraw.  This was above the 130 bcf expectation and last year’s 45 bcf withdraw, which means that for the first time this winter storage is less than last year.  It was an important week given the prior week ended Dec 2, the storage withdraw was only 42 bcf (down from 71 bcf last year).   US storage is now 3.806 tcf vs 3.856 tcf last year, but still above the 5-year average of 3.620 tcf.

But it looks like it is getting warmer for the end of Dec. We recognize that weather forecasting is far from perfect and the near term weather can be very different from the forecast.  [We can’t help pass on the humorous video clip of Rick Mercer’s take on Environment Canada’s 7 day weather imperfections [LINK]].  The extreme cold has been in the Midwest/Plains and moved east this week. However, in the last few days, the near term weather forecasts changed to call for a shorter period of the extreme cold in the east and moving to warmer than normal for the last 7 to 10 days of Dec.    Today, Accuweather had its Christmas weather forecast titled “Mild weather pattern to squash white Christmas chances across the US[LINK], which stated “a mild weather pattern will grip the nation, leaving few regions the opportunity to see flakes fly on Dec. 25.”  NOAA updated its 8-14 day forecast map today [LINK], which forecasts warmer than normal temperatures for Dec 23-29 in the east.

NOAA 8-14 Day Outlook, Valid Dec 23-29, 2016

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We won’t be surprised to see some natural gas capital move to the sidelines until Jan.  Cdn natural gas producers have been ecstatic with a $3 HH gas price, and the big move in Dec to a  current 2017 HH strip of ~$3.40 has been a huge added bonus, leading to many Cdn natural gas producers being up up >100% in 2016.  We expect there was less than expected natural gas stock selling in early Dec (tax loss selling period ends Dec 23) as natural gas was in its big >60% HH price move.  Today, there was the very large 147 bcf storage withdraw, yet HH was down $0.14 to $3.42.  Its not so much that the bitter cold is ending a few days early.  Rather, Dec is the first of the big demand months, and there is the risk that the new weather forecasts could be correct and it turns out to be warmer than normal in the east for the last week to 10 days of Dec.  And if Dec ends warm, then it means that Dec likely won’t make up for the warm Oct and Nov, and the math gets tougher for the remaining winter period to reduce storage to levels to support a 2017 HH strip of ~$3.40. At the same time, investors have made very big returns on natural gas stocks so far in 2016 and may just want to be cautious over the rest of Dec.