Natural gas prices have been in a free fall since mid-June with spot prices declining by nearly 25% as record high storage injections over the past 16 weeks have helped assuage trader concern of below-normal storage.
Storage of natural gas in the U.S. at the end of March 2014 was at an 11-year low. A relentless winter during 2013-2014 boosted demand of natural gas for heating resulting in a drop of domestic stocks from the 2nd highest level on record of 3,834 Bcf (billion cubic feet) reached the second week of November 2013 to a low of 822 Bcf the last week of March 2014.
The deficit of natural gas in storage at the end of March 2014 was 54.7% relative to the 5-year average. However, record high storage injections over the following 4 months has narrowed this deficit to just 18.9% as of week ended 08/08/14.
There are now 12 weeks left in the current injection season for natural gas which officially ends the last week of October.
The EIA has forecast in the most recent Short Term Energy Outlook that end of October storage would rise to 3,463 Bcf. If this forecast is reached, storage would be nearly 400 Bcf (10%) short of the peak storage reached over the past 5-years which has averaged 3,851 Bcf.
End of October storage for 2014 will likely fall well below storage levels seen in previous years.
In order to reach the forecasted end of October storage level predicted by the EIA, an average of 83 Bcf per week over the next 12 weeks will need to be injected into storage.
Over the past 5-years, the average weekly injection during this same time frame has been just 62 Bcf.
The last 4 weekly storage injections have been historically high surpassing the 5-year average weekly injection by a hefty margin. But each weekly number has come in near the lower end of pre-report estimates.
Tomorrow's storage injection average guesstimate of 82-83 Bcf would be right at the weekly number needed to reach the EIA end of October forecast. But if tomorrow's number again comes in lower than expected then market concern could quickly change from "how low can it go" to "storage may be lower than anticipated".
Seasonally, over the past 13 years, the post-summer low for natural gas has formed during the months of August or September during 8 of the 13 years. In 2010, the low formed the first day of October. The 4 other years when a post-summer low did not form were exceptional. 2005 following Hurricanes Katrina and Rita blowing out the Gulf of Mexico production area, 2008 during the "Financial Meltdown" and 2011-2012 when domestic stocks were record high and winter demand near a record low.
For 2014, the seasonal low, if it hasn't already been set, should be near.
Technically, the market first in July and then earlier this week has not been able to break beneath previous lows set last November. This is another bullish indicator.
When a final low is set, a seasonal rally back higher into the early months of 2015 is expected.
Tomorrow's storage report could be the catalyst for a volatile price move.
The biggest factor to watch over the next 12 weeks will be the weekly storage report released each Thursday at 9:30 am central.
12 weeks left - 83 Bcf injection per week needed. That is all that matters.
Carl Neill
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