(This guest post comes courtesy of a pseudonymous natural gas trader)
The United States Gas Economy is simple: Supply-Demand=Storage. Every day of the year.
The EIA releases an aggregated survey-based estimate of US natural gas storage weekly – produced from submissions of form EIA-912 by storage and pipeline operators. This is an original data source from which our understanding of current US storage, and therefore the supply/demand balance, is predicated. This is why this weekly number garners the attention that it does: it is, in large measure, the genesis of nearly any understanding of the US Natural Gas market. Much has been made of the burgeoning “balancing item” in EIA data; a favourite of the “gas is in decline, damn it” crowd. The “balancing item” is a plug figure enlisted by the EIA to balance their supply estimates with their demand estimates as they then both relate to…weekly storage data. In other words, a popular argument is EIA 914 is materially overstating production because we would actually have significantly higher storage inventories if EIA 914 estimates were correct.
Storage data is not in question. Is it free from errors? Not a chance. Are they huge? Could be. I am not warrantying them in any manner. But, I am not aware of any current challenge to storage data and it is not in any way being questioned by Thursday’s release of revisions to EIA 914 data. This is important.
If storage data is not in question, meaning, there is no challenge that current NG inventories sit at 1,829 Bcf, then whatever revisions are made to production data in EIA-914 will necessarily result in commensurate downward revisions to demand estimates. It does not, in any way, alter our understanding of the supply/demand balance, it simply shifts the legs that constitute the balance. Any shift we find on Thursday will be important. If we see a decline in production, principal deductions will be that production was more sensitive to the largest abandonment of gas rigs in the history of mankind and that demand was more sensitive to the greatest liquidity-driven recession in the history of mankind. This will not require an extended walk with reasoning should it be called upon. Some would argue it makes for a more realistic script.
Back to the 1,829 Bcf and April 16, 2010. This proves to be the highest level of NG inventories for this time of the year; it is higher than last year by roughly 95 Bcf. This is interesting to some, as we did see a record draw for Dec 1 – Feb 28 this past winter – largely driven (this is becoming better understood with each storage report this spring) by marvellous winter events (research the Arctic Oscillation: you’ll find grown scientists insisting upon a -4.5 sigma event this past winter). DFW got a foot of snow in mid Feb. Washington’s Dulles got 42 inches of snow, the entire accumulation from the previous 4 years, in 6 February days. The 2.1 Tcf pull from storage Dec 1 – Feb 28 was the subject of considerable conversation as it became forecasted by mid Feb and realised into early March. How much was due to not only the severity of the cold, but the location of the cold? Shifts in demand are not uniform across the country for a given drop in temperature. Answers not found through some healthy mixture of hard-nosed analysis and incantation would be found through time: spring would deliver some clarity.
March registered a net draw of 45 Bcf. This is followed by a current estimate for a net build between 290 and 305 Bcf for April. March is a record-low draw; April will prove to be a record-high build. While temperatures were very mild (both March and April looking to be the 2nd warmest over the past 5 years), when adjusting for weather, given the storage result we have for the last 5 weeks it becomes difficult to husband the storage results from the winter (through Apr 16 – a build of 214 Bcf, the largest on record, beating last year’s record result for the same period (days 71 – 106 of the year) of a build of 79 Bcf). Further, it strongly suggests that winter storage results were not driven by the material tightening of the supply/demand balance but rather the idiosyncratic matrix of temperature and place this past winter.
This is not a call on price. There is healthy doubt swirling around the idea that shale gas has changed exploration and production into a manufacturing process. But the key element that directly influences price – the supply/demand dynamic, a.k.a. storage – will not be under review on Thursday with the release of revisions to EIA 914. We are likely to simply learn that production and demand were reasonably more responsive to the historical elements that have driven them since Jan 2009. Given the fact that until last week we hadn’t seen a decline in gas rigs since Christmas, mounting the largest net add to gas rigs over a four-month period in Baker Hughes gas-rig-data history, the potential for a more responsive production data set to changes in rig counts doesn’t immediately wax bullishly.
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