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).
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 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.
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