Triple-digits galore

Published at 17:04 25 Apr 2019 by

Today’s report (week ended 19 Apr): EIA net change: +92 bcf, EA: +94 bcf

  • To adjust to today’s print, we upwardly revised both res-com and baseload industrial demand by 0.1 bcf/d each, and downwardly adjusted production by 0.05 bcf/d (see page 3 of the attached report for our weekly balances).

Next Thursday’s report (week ending 26 Apr): EA preliminary: +111 bcf

  • Next week’s report will kick off a projected string of triple-digit injections. Maintenance on the Agua Dulce compressor impacted pipe flows to Mexico. A fall in gas-weighted heating degree days is set to crush res-com demand by 2.6 bcf/d while power burn will be flat w/w.

Triple-digits galore

Our weekly balances are showing triple-digit injections for each week out to the week ending 7 June, starting from next Thursday’s report. That is a significant departure versus last year, when the EIA reported a single triple-digit injection in the post-winter shoulder season. Production has been on the rise, though it has not yet managed to eclipse the weekly record high for the Lower 48. The fact that the record has not been beaten can be pinned on a series of maintenance events at various pipes and compressors throughout the country, which are tempering regional production growth. On top of the lack of April weather, gas-fired generation has been lacklustre. Our forecast end-April inventory is now 30 bcf higher than what we forecasted in our Outlook a month ago (see Outlook North America: Balances thaw, 29 March 2019). With weather forecasts currently calling for a mild start to May, the recent fall in the injection season strip appeared hard to avoid, though current market positioning may be indicating a level of support at current prices.

Power demand in the major ISOs has been tracking 10 GW lower y/y in April, on the back of a much milder start to the month and a lack of cooling load expected at the end of April. After lower-than-expected wind power generation growth most of the winter, the gains in installed wind capacity have finally turned into more renewable generation in April, further reducing the need for gas-fired power. Much of the growth came in the power markets covering the midcontinent—SPP and Midwest ISO—where wind generation was up by a combined 3 GW y/y. SPP met 70% of its load with renewable generation in some overnight hours earlier this week (21 April), which demonstrates the gains in renewables and the extremely light power load this spring to date.

We expect power burn to pick up into May once CDDs begin to accumulate, and due to gas prices falling at least 15 cents/mmbtu lower y/y, which should provide some 0.75 bcf/d more switching from coal to gas vs our Outlook published in end-March.

Maintenance at the Agua Dulce compressor station finished on 22 April and cross-border flows are now at a business-as-usual 4.9-5.0 bcf/d. Given we still see risks to the timeliness of the Wahalajara and Sur de Texas-Tuxpan pipes, we do not expect any notable incremental rise in cross-border trade in May. We have monitored flows from Tarahumara pipeline into La Laguna-El Encino near 0.04 bcf/d from 18-22 April. However, there have been no accompanying flows posted to the El Encino-La Laguna electronic bulletin board to suggest this might be commissioning activity downstream on the Wahalajara system.

In terms of US LNG exports, 20-21 April saw Sabine Pass intake rise above nameplate capacity for the first time since mid-March. However, compressor station activity has dampened flows into Corpus Christi and Cameron LNG has seen feedgas takes fall to zero in the past two days, which could just be due to typical fluctuations during commissioning as trains prepare for operation. We expect to see moderate uplift in feedgas takes next month, underpinned by further activity at Cameron LNG and Corpus Christi T2. While Freeport LNG has now requested introduction of hazardous fluids, and our flow data indicate minor volumes into the facility, FERC construction reports indicate activities will still include construction for its next reporting period covering a two-week period beginning 12 April. At other terminals, we have typically seen a one-and-a-half-month time lag between hazardous fluids being introduced and feedgas intake. Consequently, Freeport LNG might not make a notable contribution to gas demand until June.

While weather is still the major wild card for May, we have observed some market signals that indicate some support at current prices. CME data indicated yesterday (24 April) paper selling of approximately 2,000 lots of Jul-19 and Sep-19 put options contracts at a $2.50/mmbtu strike. Such a sale might indicate a view of a floor near $2.50/mmbtu. Summer (Jun-19 to Oct-19) put skews have also softened w/w by over 1% at the 10-delta level. This indicates that expectation of a drastic price move to the downside from the current level is now considered to be less risky. Nevertheless, with summer implied volatilities still at about 24%, relatively range-bound trading in the near term is still expected.

Fig 1: Summer (June-October) put skew, % Fig 2: Weekly storage change, bcf
Source: Bloomberg, Energy Aspects Source: Energy Aspects

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