(This is a guest post from an anonymous professional natural gas trader.)
The EIA released an as-expected decline in US production, amounting to an average of -0.40 Bcf per day for the Lower 48 States series for the period Jan 2009 through Jan 2010. If this was an underwhelming figure, the fact that the report now shows the latest month estimated, February, to be the new peak in US production, at 63.9 bcf/day, must have been frustrating. The 1 bcf/day increase over January does support the idea presented here that a more responsive supply-estimation method would not manifest bullishly given the record increase in Baker Hughes’ gas rig count.
Yesterday was instructive for those trying to understand production data’s place in the hierarchy of natural-gas fundamental data, for if the 914 revisions were uninspiring, the weekly storage report was
anything but. The build of 83 Bcf for gas-week ending Apr 23 signals a quickly loosening supply/demand balance and emphasises the importance of storage data over lagged production data that still do
not fit well with demand assumptions and the separately-assembled storage data. While the production news was bearish, it took a back seat to the 297 Bcf we’ve built since we began building inventories 6
weeks ago. This compares to a build of 156 Bcf over the same period last year – a record then. So, not only have we beaten last year’s record start to the injection season, we’ve doubled it. There is no
doubt that the weather since mid March has been very mild and greatly contributed to this storage result, but an aberrant spring is not akin to an aberrant winter or summer when talking energy demand. The
demand sensitivity of gas to temperature swings is not linear and from 50F to 75F is fractions of the sensitivity you see from 25F to 50F and from 75F to 100F. On a weather-adjusted basis, yesterday’s report was actually bearish against last year’s build of 82 bcf for the same week. This is significant, because the time period one year ago in gas was thought to be the hallmark of poor supply/demand dynamics.
The supply/demand balance, as understood through storage, appears to be poor and appears to be worsening (this is particularly poor news for those carrying gas through time in UNG, as contango will expand in a loosening environment). It’s prospects into May do not look bright given that we rolled the May contract this week at $4.27 – 95 cents (30%) above last year’s May expiry and 43 cents above April. This is a level that will offer pause for many of those executing economic options between coal and natural gas for power generation and encourage any existing price-sensitive marginal production. Price responsiveness – on both sides of the equation – has become a defining characteristic of gas in the new shale era. May at $4.27 will likely not help to tighten the balance, but should help to highlight the importance of storage data over production data in assessing the US gas market.