Lower production and a return of LNG demand could lead to a tight market this winter, but weather still matters.
We strived to use conservative estimates for each element of supply and demand, when the outcome could have a wide range of possibilities. Our assumptions, we believe, tilt toward the bearish. Even with those biases, our approach to modeling winter natural gas shows undersupply and argues for higher prices. Therefore, we believe we address downside price risk thoroughly and still find the bullish forces more impressive than the bearish ones.
We chose our model assumptions with a bias toward protecting against downside price risk.
The items shown to the left demonstrate how we believe we could most likely be wrong in each category.
Our expectations for average supply-demand (which is equivalent to inventory draws) shows that a mild winter, while bearish, would not be severe, according to our assumptions.
However, a cold winter could dramatically draw down inventories and prove the natural gas market to be very tight and in need of supply.
The green, dashed line demonstrates what we consider to be a “market neutral” supply-demand balance. It is the daily undersupply needed during winter to cause storage to decrease by 2,300 Bcf (based on a “normal” historical pattern of beginning at 3,900 Bcf in November and depleting to 1,600 by the end of March).