The Natural Gas S&D Is Balanced Like in 2019. That’s Bad News.

June 11, 2020
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Storage builds like those in 2019 can’t be tolerated for long. Cash prices may need to move lower this summer.

Demand for natural gas fell fast after social-distancing measures were implemented across the country in March and April. The market was oversupplied, but decreases in associated-gas supply from oil fields balanced the market during May.

But here’s the bad news: There is almost 750 Bcf (close to 36%) more gas in storage for the first week of June 2020 than there was in early June 2019. And, if storage builds keep going at this pace, there might not be enough storage available some time in September through November.

The chart below shows each week’s Lower-48 (CONUS) storage change as reported by EIA, with the corresponding average national temperature for that week on the horizontal axis. This is an AEGIS model. It shows that the last five data points look almost exactly like the trend in 2019. Storage injections represent the leftover gas after demand is subtracted from supply (supply minus demand equals change in storage).

If you are curious about the components of supply and demand, consult our Natural Gas Dashboard here. Our COVID-19 dashboard is also useful.

Last week’s injection was lower because of higher temperatures (and demand).
In the last five weeks, the supply-demand balance has reverted to 2019 levels, after AEGIS corrects for temperature.

Usually, a year-over-year convergence in the supply-demand balance is a recipe for low volatility in prices. However, a mild 2019-2020 winter left a LOT of gas in storage to start this summer. See the chart below, where the year-over-year surplus is apparent. If injections continue this summer as they did in 2019, storage limits (functionally, around 4,200 Bcf) could be reached.

There is not as much room left in storage this year as last year.
Last year’s inventory builds were tolerable and needed because summer started at a storage deficit.

There are two main ways to solve this problem, if supply doesn’t change and social-distancing demand losses don’t diminish. Both require lower prices.

Create more demand. If prices move lower, sooner, extra demand would be created in the power sector. Lower gas prices enable gas to compete better with coal. Specifically, gas prices are at a level right now where gas could pick up demand in Texas. There are limits, though. Reach out to the AEGIS View team if you need details.

Call up more storage. You can’t create more storage capacity, but you can persuade storage operators to inject more into the more flexible caverns. Unfortunately, this is accomplished by a steep, temporary drop in prices (more precisely, by more contango in the curve). In the past, the September, October, and November contracts have been vulnerable to this kind of move.

There is a silver lining to this cloud. Usually, when gas storage is threatening to fill, discounts to natural gas prices happen in the current summer. The winter months and the following summer (which would be Summer ’21 in this case) are unaffected.

If your exposures to lower prices for the remainder of summer could cause problems in your budgets, the AEGIS Engage and View teams are here to help you alter your hedge book to add protection.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com

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NOTICE: The content of this report is provided for information purposes only and has been prepared to describe current trends in the commodities markets. This information does not constitute either investment or hedging advice and is intended only for AEGIS clients. If you are not the intended recipient of this report, then you may not disclose, print, copy or disseminate this information. Otherwise, if you have received this transmission in error, then please notify the sender and delete the report.

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