Commodity Watch: July natural gas traded lower following the release of a substantially "in line" storage injection number of 87 Bcf (I was at 85 to 90 and the Street was looking for 84 Bcf). Gas closed down $0.52 to $11.47 with losses building after a sharp reversal in crude futures.
Storage levels remain in line with the five year average and low to last year. Thanks to cool late season weather in the Rockies and increased takeaway capacity, West Region gas storage is a down 25% from year ago levels AND 11% compared to the five average average. Otherwise, the consuming East region would be well below average levels as well.
Here's How I Broke Down Thursday's Number Prior To It's Release:
My Number: 85-90 Bcf injection. Last week saw an injection of 85 Bcf and the year ago period saw 106 Bcf stuffed into storage
- Weather:
- HDD's were in line with the prior week at 50,
- CDD's (Cooling Degree Days) were 28, up from 18 last week and 20 in the year ago week. EEI data however show generations was off from year ago levels.
- Imports: 8.1 Bcfgpd combined (LNG + Canadian pipes), down 3 Bcfgpd vs year ago levels.
- Exports: probably up 1 Bcfgpd, all due to higher demand from Mexico. We get an update (March 2008 numbers) from the EIA on Friday.
- Production: probably running about 5 to 6 Bcfgpd high to year ago levels (also updated Friday).
- Total Supply: up about 1 to 2 Bcfgpd.
Front Month Gas Now Looks Like This: I'm not a technical analyst and have never claimed to be, but you're going to have to do a lot more to damage that chart than Thursday's move to convince me that gas is "done" and especially to get me to buy back into UNG puts or run away from the gassier stocks we are currently long. Besides, and not to be too tongue in cheek about it, we've already had the first named storm of the season, Alma, and there is the great likelihood that the financial and mainstream news networks will play up the beginning of Hurricane season on Monday. By the way Alma is forecast to cross the Yucatan and enter the southern Gulf of Mexico Friday afternoon as a tropical depression.
The big question now is what velocity of storage rebuild can be achieved and where do we end up in October. For weeks now traders have been saying 3 Tcf (trillion cubic feet) in storage will be hard to reach by October citing weak LNG volumes (true), higher demand from the U.S. (maybe true), higher exports to Mexico (true), and hurricane damage (irrelevant unless the Gulf actually takes a hit). They of course fail to mention burgeoning production from "shale of the day" club. 3.0 Tcf used to be considered "full storage" but now failing to reach even 3.2 Tcf would be supportive of $10+ natural gas prices. To figure this equation out the real questions are:
- what price entices LNG back to U.S. shores? I think $13 to $15 would shake things up although Platts reported UK gas prices hit a record $17.81 last week,
- when does a dearth of drilling in Canada catch up with them? We've been thinking any month now for a couple of years but the recent day show a definite and sustained dip in exports so maybe its happening now
- and will lower imports and another year of higher electricity demand (which is less elastic than is the gas pedal for consumers and likely to be quite a bit more devastating as well than high pump prices) offset domestic production growth in the mid to high single % digits.
- We'll have an update on supply and demand in Monday's post.
