zman’s Energy Brain

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Gas Storage

Gas Inventories Remain 11.6% Above The Five Year Average

  • Storage as of March9, 2007: 1,516 Bcf (updated March 15, 2007).
  • Max storage for this week in history: 1,832 Bcf (2006). At present gas is at it’s 4th highest level in history for this date.
  • We have fallen 17.6% (324Bcf) into year over year deficit.
  • We remain 11.6% (158 Bcf) above the 5 year average.
  • If you take the coldest 3 week period (second week of March to the end of March) over the last 14 years you get demand of 286Bcf which would still leave 1,230 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels) but well below last year’s 1,695 Bcf. And obviously that’s not going to happen.
  • Conversely, the warmest 3 week period saw demand of only 15 Bcf which would leave storage at 1,501 Bcf (and probably drop gas to $5.00/Mcf). I don’t think that happens either. I’m estimating we reach trough storage of just under 1,400 Bcf and we bottom out at $6 gas.


gas-storage-031507.JPG


29 Responses to “Gas Storage”

  1. El Diablo said

    Take a look at my analysis. It’s not just that we have higher storage levels than in the past, but we are 2-3 standard deviations higher. Relative to the variance of past storage levels, we are in completely unchartered waters. The same holds for the end of march, even if we go to zero degrees nationwide between now and then.

  2. zmann said

    I’ve said the uncharted waters thing so many times in the past few months I can’t bear to type it anymore. The coldest non-coincident winter between now and then puts you just below average but I really doubt that’ll happen. After this snap ends I’d bet we test $6 and then $5 all in February.

  3. El Diablo said

    Although no analysts do it, I believe the standard deviation from the average is far more descriptive. For example, the last 13 years of data for the second week of January shows an average of 2,234 Bcf in storage with a standard deviation of 302 Bcf. So most (67%) years will be within 2,234 +/- 302 Bcf. 95% of time we will be within 604 Bcf of the average. This year we were 702 Bcf above average. Statistically, this deviation is double even last-year’s deviation. (using 5-year data, we are 3 standard deviations (1:200 chance of occurance) above the average. “unchartered waters” itself is an understatement.

    ps-I believe we have to go well below $5 to work off this excess–its been building for 2 years, a couple weeks of winter and a couple hurricanes isn’t going to do it

  4. zmann said

    EL D – Here ya about most analysts. But then the sellside doesn’t get paid for telling people not to buy stuff, do they?!

    I also agree that the weather is causing a suckers rally. This just won’t do it. Even if it does the supply / demand isn’t nearly as bullish as the industry would have you believe nor are the economics so lousy that gas isn’t worth producing at $4 as many would have you believe.

    I think the we’ll see a bottom in the $4s this year Mar/Apl depending on how hot people think this summer is going to be. As long as oil holds $45 though I think gas will be hard pressed to stay below $5 for a 2007 average since imports from Canada are likely to fall, eroding the surplus this summer. Calling the fundamental bottom on gas is going to be the biggest challenge this year.

  5. El Diablo said

    Another nugget for you: 10 weeks remain in withdrawal season. The LARGEST draw during ANY 10-week period was 1,702 Bcf (12/20/2002 – 2/28/2003). Even if we draw the most we ever have in the 10 weeks remaining until the end of March, we would end withdrawal season with 1,221 Bcf in storage vs. 1,228 Bcf 5-yr average for that week. Stated another way: anything less than the worst-case scenario leaves us well-above average at the end of the winter.

  6. zmann said

    El D,

    Just saw that you have a blog. Good read. As far as your sub-title goes, me too except for the CFA and I was an E&P and natural gas analyst on the sellside, with portfolio management and investment banking prior to that.

    I agree with you completely. Prices are out of hand right now. Utterly ridiculous. If we get the coldest Jan-Mar ever it just gets us back to average.

    I do see some concerns on the horizon but they don’t support gas at these levels right now.

  7. El Diablo said

    MATH CORRECTION to last comment: Even if we draw the maost we ever have in the 10 weeks remaining unitl the end of March, we would end withdrawal season with 1,234 Bcf in storage (2,936 as of 1/12/06 less 1,702) vs. 1,228 Bcf 5-yr average for that week.

  8. El Diablo said

    The over/under for this week’s withdrawal is 169 Bcf: anything less moves us further away from the 5-yr average storage level for the week of 2,304 Bcf (i.e. makes the deviation for the week greater than last week’s 20.1% above average). So in order to start working off the excess, we need a draw greater than 169 Bcf. Given that HDD data shows us normal for the week, 210 HDD, and 30% colder than last year’s 163 HDD, I’d take the ‘under’ and project withdrawal closer to the 5-yr average for the week of 141 Bcf (vs. last year’s 81 Bcf), and a continuation of the positive deviation from the average.

  9. Miocene Jim said

    This is a great site, I just found it.

    Question:
    Can someone tell me what source is used to get the wall street consensus natural gas storage withdrawal numbers for the week? I’ve looked on first call and bloomberg and my search comes up empty. Oil and gas journal MarketPlace seems to quote this number a lot, but they don’t indicate the source.

    Thanks for the help.

  10. Brian said

    http://tonto.eia.doe.gov/oog/info/ngs/ngs.html

    Scroll to the bottom….it’s updated at 10:30AM on Thursdays.

  11. bill fraser said

    From Tradewinds:
    Declining US natural gas
    storage inventories coupled
    with falling exports from
    Canada and rising demand
    in both countries could
    boost North American
    commodity prices this
    summer.
    Analysts are pencilling in
    a potential rise of at least
    20% to $9 per million
    British thermal units.
    They also agree that if
    there is an exceptionally hot
    summer that drives air
    demand in tandem with
    hurricane-caused
    disruptions to Gulf of
    Mexico supply, prices could
    even return to the $15 level
    seen in December 2005.
    “I am extremely bullish,
    probably the most bullish I
    have been in the last 10
    years,” said Peter Linder,
    analyst with Delta One
    Energy in Calgary.
    “We are getting the
    perfect storm for much
    higher North American
    natural gas prices.
    “The cold weather of
    February has eliminated the
    storage problem. By the
    end of March we will be
    below the five-year
    average,” he argued.
    Working gas in storage
    was 1.7 trillion cubic feet as
    of 23 February, according to
    the US Energy Information
    Administration. That is 263
    Bcf less than this time last
    year and 179 Bcf above the
    five-year average for of 1.5
    Tcf.
    Analysts believe Canadian
    natural gas volumes
    available for export to the
    US could drop by as much
    as 1 Bcf per day, or about
    11%, in 2007, tightening
    available supply and likely
    ratcheting up futures prices.
    “We see the supply
    warning lights for the North
    American natural gas
    market as already beginning
    to flash more brightly,“ said
    Martin King, an analyst at
    Calgary-based energy
    boutique FirstEnergy
    Corporation. “But no one in
    the broader market really
    seems to be watching.”
    Canada produces around
    17.5 Bcfd of gas, about half
    of which is exported to the
    US. That figure is set to fall
    this year as companies scale
    back their gas drilling
    programmes because of
    lower prices.
    King sees Canadian gas
    production dropping by as
    much as 800 MMcfd by
    July.
    Growing demand for gas
    from oil sands producers
    operating in northern
    Alberta has boosted
    domestic consumption by at
    least 300 MMcfd in the
    past few months.
    That sets the stage for a
    potential reduction in
    exports to the US of 1 Bcfd
    in mid-2007 or “the largest
    reduction in export volumes
    in a generation”, King said.
    And no one now expects
    LNG to save the day for
    North America as premiumpriced
    long-term contracts
    offered by Asian consumers
    are diverting supply.
    “There are many other
    countries looking at LNG as
    a panacea to their gas
    supply woes, yet in North
    America it seems like the
    way we are trying to deal
    with this problem is to pray
    that we continue to have
    warm winters,” Dave
    Hughes, a geologist

  12. bill fraser said

    Be careful not to get carried away one way or the other. Yes, we are over the 5 year average, but we are down big time relative to last year and you know hat happened to prices in the summer. The 5 yr avg is only if production and demand equate to the 5 yr avg but as the article points out production will come off line and Canada is using more and with a warm summer Deman will outstrip supply.

    Might be worth a few speculative call options here for the summer

  13. bill fraser said

    If your bullish on gas stocks , what is the best value inho

  14. El Diablo said

    I don’t quite follow the logic here: The assertion is that Canadian oil sands producers will curtail production because of falling prices, then simultaneous warmer-than-normal summer followed by greater-than-normal hurricanes hitting the gulf will send prices to $15?! If the Canadian oil sands producers believed this scenario was more likely than not, they would not stop producing in the first place. I would have to believe they would forgo profit potential of $7 greater than current prices in order to avoid a small loss if prices go to $6?!! That’s called cutting off your nose in order to spite your face….

    As for the other points: hurricanes have hit the GOM since it was formed millions of years ago. I am certain that hurricanes will hit the GOM this year, just as they do every other year. It must be a greater-than-normal occurance for the market to care. I won’t even expound on the storage assumption that starts the article, just leave it at there is absolutely no way possible that we have less storage than the 5-yr average at the end of march, zmann has already exhausted that analysis….

  15. >there is absolutely no way possible that we have less storage than the 5-yr average at the end of march, zmann has already exhausted that analysis…

    Will you guarantee that?

    The week is significantly lower than last year and last year we had hi summer prices. Whats the relevance of 5 year averages? I say a comparison to last year inventory has more relavance

    Anyways, the article was making a case for higher prices in the summer as production won’t keep up with demand. One man’s opinion and one should understand the bullish and bearish assumptions. Thought some would see value in it

  16. zmann said

    I definitely see the value in understanding both sides. And I agree that some of the factors presented in the article will provide psychological and potential fundamental support to gas prices.

    I happen to think that the supply disruption from Canada argument is a bit overblown although imports will be down some.

    An expected rise (by the EIA) in LNG imports should take up some of the slack in that case.

    I’ll address some more of the issues shortly.

  17. El Diablo said

    logic is logic, applies to bulls and bears equally. I take issue with the logic that ‘traders’ can see this impending supply crunch, yet the ‘operators’ that have invested millions in hard assets won’t see it (again, by the assertion that ‘companies scale back their gas drilling programmes because of lower prices’). This, in turn, would contribute to the ‘supply crunch’ and cause prices to go higher. Logic says that in order for this ‘perfect storm’ to develop, producers must mis-read the potential in the market and act to reduce production. Else, the entire argument falls apart. I question what the traders in the story see so clearly that the producers can not see: ‘But no one in the broader market really seems to be watching.’ I hope its more than the weather channel….

  18. bill said

    NG bears are still missing the boat, referring to 2003 data (the year we had chronic gas shortages and power failures, ultimately leading to the bull run of 04-06) and ignoring the fact that spot and strip prices are higher than last year!

    This week’s drawdown will be small, perhaps 90-100 bcf, but we may be in for a drawdown of 180bcf+ next week, bringing storage below 1.5tcf. NG stocks are even more beat up. Most juniors are trading at 3x cash flow, majors 5x. You have to remember as well that each year’s storage has to be higher than the year before, because demand is growing (all things being “equal”, such as weather). So, in reality, once we dip below the 5 year average by more than 2-3%, that will be the beginning of the next big bull run in NG stocks. All it will take is an early heat wave or two in the south, or more cold weather in the NorthEast in the next six weeks and/or an early heat wave in the NorthEast.

  19. El Diablo said

    Here is the total annual natural gas consumption for each of the past 10 years in MMcf:

    1997-22,737,342
    1998-22,245,956
    1999-22,405,151
    2000-23,333,121
    2001-22,238,624
    2002-23,007,017
    2003-22,276,502
    2004-22,388,975
    2005-22,241,202
    2006-21,859,496

    http://tonto.eia.doe.gov/dnav/ng/hist/n9140us2a.htm

    Someone please explain where demand is growing?! (Other than in the imaginations of gas company managements and clueless speculative traders)

  20. Interesting Diablo,

    THe speculators would make you believe that gas demand has ran ramped the last couple of years, yet it is the opposite.

    -SaneO

  21. Chris said

    The next 2 weeks looks to be above average temps, much higher here in MN. Dont see any reason for much of a rally in prices from here.

  22. Robert said

    Diablo,

    Oil sand producers produce oil and use ng to extract the oil from the sand. Producers of NG as follows,

    http://www.cattlenetwork.com/content.asp?contentid=94773

    The three have swithched their drilling efforts to a higher ratio of oil instead of ng. Oil sands is simply a consumer of ng. Canada also plans to send more of their ng to assist with oil sand production. If you look at the numbers of production in the US, production is declining and Canada has been making up the difference.

    http://tonto.eia.doe.gov/dnav/ng/hist/n9050us2A.htm

    http://tonto.eia.doe.gov/dnav/ng/hist/n9102cn2A.htm

    Here you can see the US becoming more dependent upon imports from Canada to makeup for its lack of ability to produce domestically. Also the picture of 10 years on consumption is a narrow scope and does not show the entire picture of annual consumption. Go back just about a decade and you will see remarkable growth in US Consumption. The anamoly of 05 warm winter is just that an anomaly and we could be in for a surprise if not a shock.

    R.

  23. Robert said

    to include from last post the three producers of ng.

    EnCana Corp. (ECA), Canadian Natural Resources Ltd. (CNQ) and Talisman Energy (TLM), have slashed their gas exploration budgets for 2007 and invested elsewhere.

  24. bill fraser said

    good posts Robert

  25. El Diablo said

    Gas companies don’t slash exploration budgets when they believe that gas prices are increasing. Perhaps you see something that they don’t.

  26. Robert said

    Diablo exactly, prices have been decreasing. Their choice to cut budgets is an effort to increase prices. I see it no different than what OPEC would do, cut supply to drive the price up. Oil is more the focus for current profit seeking with the previously listed Canadian companies. Also For everyone’s viewing I have an update on the Canadian perspective. Looks like they have teeth to their claims to cut production as active rig counts are down.

    http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070308005414&newsLang=en

    NG is certainly not in a bull market but the path towards such has been started. Weather is such a wild card and anything is possible between now and next winter. Last Summer had quite an interesting blip in demand. Also take a look at the increase YOY for electricity consumption of ng. Two links are lain respectively. Oh yeah, thanks for the validation Bill.

    http://tonto.eia.doe.gov/dnav/ng/hist/n3045us2M.htm

    http://tonto.eia.doe.gov/dnav/ng/hist/n3045us2A.htm

    Robert

  27. Robert said

    Another area for NG in 2007 is the planned generation of electricity using NG.

    http://www.eia.doe.gov/cneaf/electricity/epa/epat2p4.html

    Here you can see a significant number of generators to come online. The one area I am unclear on is are they going to replace older less efficient ng, coal… generators or what percentage of them are actually new or due to US demand/population increases. If anyone has any information per such I would appreciate any direction.

    Robert

  28. El Diablo said

    In 1998, the US had 162,000MW natural gas-fired generating capacity. As of 2005, that number had grown to 437,000MW. So from 1998-2005, we added 275,000MW natural gas-fired generating capacity. This compares the the ‘planned addition’ of 57,000MW over the next five years.

    Now here’s the tricky part: Go back and look at my total consumption numbers and see how much demand was created by the addition of the first 275,000MW (hint: 1998 demand=22,245,956; 2005 demand=22,241,202).

    If these ‘planned’ plants are going to be adding to demand, they must be terribly inefficient.

  29. Robert said

    Diablo,

    thanks for the info.

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