Bullish EIA Natural Gas Storage Report -- RBN Energy -- June 13, 2016

RBN Energy: a bullish EIA storage report signals a big shift in the US natural gas market. Folks paying attention will note that a couple of dots are starting to connect concerning this story and a recent John Kemp tweet. Earlier I said I would come back to this if the spirit moved me. Apparently the spirit moved me. From RBN Energy today (at the link is much, much more):

The U.S. Energy Information Administration on Thursday (June 9) reported a surprisingly bullish 65-Bcf injection for the week ended June 3—that was 8.0 Bcf below our Natgas Billboard estimate and more than 10 Bcf below the Bloomberg industry average assessment. [Wow!]

In response, the CME/NYMEX Henry Hub July natural gas contract screamed about 15 cents higher following the report to a settle of $2.617/MMBtu, the highest daily settle for the prompt month in nearly 9 months.

Thursday’s gains extended a rally that began on May 31 (2016) just after the July contract rolled to the front of the futures curve. It’s likely the rally was initially spurred by market participants looking to cover their short positions. But in the past week, an increasingly bullish fundamental picture has emerged prompting us to raise our price outlook.

In today’s blog, we analyze the fundamentals behind rising natural gas prices.

We closely track natural gas supply and demand to forecast storage and price in the daily NATGAS Billboard report – a joint venture with our friend and veteran expert Kyle Cooper of IAF Advisors.

On the supply side, U.S. natural gas production was initially relatively flat following the June contract expiration, but since last week, production has declined by 0.6 Bcf/d to an average of 71.9 Bcf/d the week of June 3, which is also 0.5 Bcf/d below the 30-day average and 1.0 Bcf/d under the year-to-date average.

Production volumes have been struggling to stay above 72 Bcf/d much less get back to staying consistently above the 73 Bcf/d mark we saw in March and early April (2016). A combination of pipeline maintenance events (which can reduce capacity available for receiving and flowing gas) and possible operational issues related to another bout of heavy rains and flooding down in Texas is keeping production down. Volumes are not just down week-on-week but also flat to lower versus last year, which is supportive of price.

But in our book, that alone would not seem to warrant a 50-cent run-up in price.

However, when we factor in demand, the rationale for a much more bullish outlook firms up.

U.S. consumption – including power, industrial and residential/commercial demand – has climbed nearly 1.0 Bcf/d over the past two weeks. By itself, this isn’t extraordinary for this time of year.

After fairly moderate (boring) weather through April and May, national average temperatures are gradually rising as summer approaches, which is bringing on incremental gas-fired power generation demand for air conditioning—again a normal trend for this time of year. But indications are that power demand is coming on much stronger earlier in the season than usual.

Since June 1, natural gas demand for power generation has averaged close to 30.5 Bcf/d, which is a new record high for this period and about 4.0 Bcf/d higher than last year. It’s also a big jump (of more than 5.0 Bcf/d) from the May 2016 average.

June 1 also marked a step change in how much gas is being burned per degree (temperature-adjusted demand).

Our NATGAS Billboard models demand to show where it’s coming in relative to historical volumes at the same temperatures.

Demand from April 1 to June 1 (2016) had been averaging about 2.6 Bcf/d higher than it historically has on a temperature-adjusted basis and had climbed to as much as 5.3 Bcf/d higher --- the expected result of increased gas-fired generation capacity and lower natural gas prices relative to coal. But in the last two storage weeks (since May 28), that weather-adjusted demand level has shot up to an average near 4.4 Bcf/d, with a couple of days coming in well over 6.0 Bcf/d.

The natural question is what is driving this supply/demand delta? RBN Energy suggests it could simply be a reporting error; not all data is available. I like to think it might be related to US manufacturing but I'm always looking through oil-stained glasses.

Much more at the RBN Energy link. But did you catch that "temperature-adjusted demand" stuff?

By the way, connect today's RBN energy blog with the recent John Kemp tweet in which he noted that "cooling days" were increasing across the US this summer.