Energy Market Outlook – July 30, 2018

ENERGY NEWS AND MARKET INFORMATION – 7/30/2018

By: Jason Scarbrough

It would seem the market has gone from very complacent to completely absentee. While it is true domestic production continues to surge on a monthly basis, there doesn’t seem to be an accurate accounting for the scope of increase in demand of domestic natural gas we have had already. Furthermore, add what is currently slated for exports (LNG and pipeline) and domestic industrial/commercial demand in the relatively near future.

Let’s just stick with this summer of 2018 for now as we head into the real dog days for weather driven summer demand:

The EIA reported a net gas storage injection of 24 BCF for the week ending July 20, 2018. This week’s report is indicative of how this summer has been falling short of expectations, and far below what the current five year average is at 62 BCF.  The current levels are a paltry 2.27 TCF — almost 24% (705 BCF) less than the same week 2017. The EIA is forecasting end of season storage levels to be at 3.504 TCF.  To get there, we have to put back a total of 1.23 TCF or 118% of the 5 year mean. And so far this season, injections are coming in at 88% of the five year mean.  There is approx. a 4% probability that storage can get to 3.5 TCF (25-1). If I were a betting man, and I am, I would be taking the other side of that bet.

It is much more likely we end injection season closer to 3.4 TCF and head into winter at the lowest levels we have seen since 2008 when natural gas was trading at $6.50/MMBTU on the prompt contract.

So, we are going to enter winter at levels well below what the market is accustomed to (the average for the last 6 seasons is 3.83 TCF +/- 0.12 TCF).  And you can buy the winter strip below 3$ for the next three winters as of today –  that is a heck of a deal.

 

While there will undoubtedly be an increase in demand from power generation as more and more natural gas fired plants are erected; and for all of the industry that comes back to the US, the wild card I am looking at the most right now is exports of our production.

The EIA is providing another VERY conservative forecast for 2019 natural gas exports of 5.5 BCF/Day.  This is up from only 2 BCF/day in 2018 – an increase of 175%, and I haven’t seen an official forecast for 2020, but it is looking like a similar increase given the anticipated exports coming on line in the next few years.  And even more beyond that.

Natural gas production continues to increase with seemingly no end in sight through technology, cheaper techniques and equipment, and of course as oil prices rise – that creates a secondary supply of natural gas.  But can it really keep up given the extent the US is slated to become a net exporter?

 

 

Technicals

Right now the bulls are on vacation, failing to hold a rally above 3$ even in the face of the hot weather and the lowest storage levels in a decade (or there about).  There is a glimmer of life today as August rallied as the prompt contract and all three key technical indicators (MACD, Parabolic, and Spearman Indicator) have turned positive.

However, this is a pretty pathetic chart for the bulls and it will be a tough go to create any real rally beyond that June high around ~3.10.