Winter withdrawals are here

Published at 17:14 9 Nov 2017 by

Today’s report (week ended 3 Nov): EIA: +15 bcf, EA: +15 bcf

  • Today’s report was in line with our estimate. Dry production averaged 75.2 bcf/d, bringing total supply to 80.8 bcf/d. Demand averaged 78.6 bcf/d driven by 21.8 bcf/d of res-com demand and 21.7 bcf/d in the power sector.

Next Thursday’s report (week ending 10 Nov): EA preliminary: -12 bcf

  • Versus yesterday’s projection for a 9 bcf withdrawal, we have shifted the demand-side components. The most notable increase was in the electric power sector, where preliminary data for yesterday and today indicate a sharp increase from earlier in the week to above 26.5 bcf/d, bringing the weekly average to 23.7 bcf/d.
  • On the supply side, we made a modest 0.1 bcf/d downward revision to US production to average 76 bcf/d.

Winter withdrawals are here

Based on flow data available for today, as well as our weekly supply and demand balances, next week’s Thursday EIA data release looks poised to show the first withdrawal of the heating season. And price has finally responded to the uptick in weather-related demand with the prompt month contract breaking the psychological 3.20 $/mmbtu level today and cash prices settling at 3.15 $/mmbtu yesterday. This price appreciation occurred despite a backdrop of output hitting new records of more than 76 bcf/d, a rapid pace of growth from an October average of 74 bcf/d.

While the strength of supply cannot be denied, demand is shaping up to be nearly 8 bcf/d y/y higher for the month if current forecasts hold. Such gains should easily eclipse supply gains over November, which are expected to run between 5.5-6.0 bcf/d. Our balances for this month point to a res-com demand gain of over 5 bcf/d, with a further demand gain of 0.2 bcf/d coming from the power sector.

In addition to the 5.2 bcf/d from the res-com and power sectors, structural demand is contributing close to 3 bcf/d of growth to our balances. Meanwhile, there have been zero deliveries of feedgas into tanks at Cove Point from October through to today. On the Gulf Coast, Sabine Pass feedgas deliveries have trended near 3 bcf/d (outside of the first two days this month), setting up for a 1.5 bcf/d y/y increase in supply for LNG export. Pipeline deliveries to Mexico have picked up in recent days, with our November forecast pegging deliveries at 4.4 bcf/d, higher y/y by 0.4 bcf/d. Baseload additions to industrial demand, as well as heating needs in the sector together should account for up to 0.7 bcf/d y/y of growth over November. Of this, 0.3 bcf/d is estimated to be from baseload requirements and 0.3-0.4 bcf/d from industrial heating requirements. Baseload requirements are being driven by recent additions to Gulf petrochemical infrastructure as well as ammonia additions in the Corn Belt. Lease plant and pipeline fuel—often maligned as being within the ‘other’ demand category, and thus of reduced importance—are together forecast to account for another 0.4 bcf/d y/y of growth in November. Given the large-scale increases to both supply and demand, this component that normally flies under the radar is set to support the additional production and call on supply in the market.

On the supply side, production gains will amount to near 5 bcf/d. In addition, net flows from Canada are already trending much above last November’s 4.9 bcf/d average, making a 0.6-0.7 bcf/d incremental gain likely. Total supply gains should trend just below 6 bcf/d.

In summary, these figures suggest November fundamentals as a whole are tracking near 2 bcf/d tighter y/y. Our current projected end-November storage level of 3.64 tcf represents a 300 bcf y/y deficit. Aside from this week gains, the stickiness of sub 3 $/mmbtu prices in the prompt contract and cash market signalled the market’s preoccupation with potential oversupply. With some winter weather finally materialising, the underlying tightness of fundamentals that we have called attention to in recent editions of Panorama seems to have finally dawned on a broader array of market participants, with prices running up by some 0.20 $/mmbtu from the end of last week.

Next week’s projection for a 12 bcf withdrawal, followed by another 37 bcf call on inventories for the week ending 17 November, are already priced into the market. Changes in weather forecasts will continue to drive price before the peak heating season gets underway. In that regard, any shift in near-term forecast will be crucial if the market manages to break above 3.27 $/mmbtu, or retreat from this week’s gains and regroup further, back below 3.15 $/mmbtu.

Fig 1: November US balances, y/y change, bcf/d
Source: Energy Aspects

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