Experience RS

Riding the Swings – Weather and Natural Gas

Just about a month ago, the U.S. Energy Information Administration (EIA) reported a 65 Bcf injection, 9.29 Bcf/d, for the week ended July 26. The injection swamped both the 2018 build and the five-year average, respectively beating those marks by 32 and 23.8 Bcf. Cooler-than-normal weather helped support the injection rate, but the market interpreted the announcement as overwhelmingly bearish; prompt month prices dropped from $2.20 to $2.12/MMBtu.

So why did prices react so negatively to a single week’s injection? Because weather explained only about 4 Bcf of the excess injection, meaning supply outpaced typical seasonal demand by around 22 Bcf. Temperatures deviations don’t usually last long, but structural disconnects, an excess of supply over demand, can support injections through a season – and signal price declines. Indeed, prices stayed low even after weather turned hot in August.

Figure 1 shows normal injections in pink, actual 2019 injections as the blue line and our modeled estimates of the weather and structural drivers underpinning weekly injections. And through this injection season, both weather and structural factors supported strong seasonal injections – most weeks this spring, green (weather) and orange (structural) bars were both positive.

But by mid-July, weather was adding gas demand relative to seasonal norms, as seen in the green bars turning negative. While the injection for the week ending July 26 wasn’t especially large relative to history, it was the most bearish in three weeks once you take into consideration how hot that week was.

The market doesn’t value storage as much as it once did, the rise of the power sector means demand is more sensitive to cooling degree days (a measurement of energy needed to cool a building) than it’s been in the past, and LNG with seasonal maintenance introduces more week-to-week volatility. But even though these changes can muddy interpretation of a weekly report, a weaker- or stronger-than-expected injection that breaks a trend or can’t be explained by weather can still swing prices.

FIGURE 1 | Structural and Weather-Based Injection Rates



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