(My reports focus on Natural Gas as it is the largest energy source for the generation of Electricity; therefore, Natural Gas and Electricity are highly correlated.)
In my April 2nd Energy Update, I discussed the ramifications of cooler than normal weather continuing into mid-April, which further tightened supplies. In today’s update, I discuss the present state of Natural Gas supplies and explain why the delay in building supplies increases the risk of higher prices during this year’s injection season.
Normally the winter draw of supplies ends by the end of March and the injection season (building supplies for the next winter heating season) runs from April 1st thru Oct 30th. But this year we experienced cool weather well into April, thereby increasing heating demand for Natural Gas and supplies continued to decline into late April, which is unprecedented.
Every Thursday, the EIA, reports Natural Gas storage as of the previous Friday, and on April 19th, the EIA announced a larger than expected 36 Bcf decrease in Natural Gas supplies. This week, the EIA is expected to announce another decrease of approximately 10 Bcf, which if correct, would result in Natural Gas ending the winter heating season 519 Bcf below the 5 Yr. Avg. with 1,289 Bcf of Natural Gas in storage.
Below is a summary of the estimated EIA weekly storage reports for the weeks ending April 13 & 20th compared to 5 yr. Avg.:
As of this week’s EIA storage report, supplies will be nearly 29% below the 5 Yr. Avg. We have 28 weeks left until the injection season ends on Friday, Nov 2nd. Therefore, Natural Gas supplies will need to increase weekly approximately 18.5 Bcf more than the 5-Yr. Avg. over the next 28 weeks.
Although projected increased production will help, it will be difficult for supplies to approach the 5 Yr. Avg. by the end of October. Demand is also increasing with exports to Mexico providing additional growth along with record shipments of Liquefied Natural Gas overseas. And as I explained in my April 2nd Energy Update, the single greatest increase of demand of Natural Gas is the generation of Electric Power. Electric power is now the primary consumer of Natural Gas in the United States, and a warmer than normal summer will lead to a significant shortfall of supplies prior to this year’s winter heating season, and likely lead to much higher prices.
As I have explained in previous reports, Natural Gas prices are low from a long-term perspective, and a buying opportunity for hedgers, especially when supplies are substantially below the 5 Yr. Avg., which can be fully appreciated by reviewing the chart below:
Due to colder than normal weather, Natural Gas supplies have declined into late April, which is unprecedented, and as of this week’s EIA storage report, supplies will be nearly 29% below the 5 Yr. Avg., which increases the risk of higher prices during this year’s injection season.
Therefore, since Natural Gas prices are very low from a long-term perspective, I believe hedgers would be wise to secure Natural Gas and Electricity near present price levels.
Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities now. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.
North American Energy Advisory
Senior Commodity Analyst