Mild Weather Could Thwart Otherwise Bullish Gas Fundamentals

September 11, 2020
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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).

Let’s be frank — warmer-than-normal temperatures in winter will always be bearish. At least, they are bearish in the moment. But we can see how even a mild winter does not have as bearish effect it has had in the past. 

Our largest concern is that high inventories can suppress this market for the first half of winter. But look ahead to 1Q2021, and we think the effects of low supply start to show up. 

We continue to monitor oil, gas, NGLs, regional markets, jet fuel, and interest rates for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact [email protected] Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at [email protected]

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