Wholesale Natural Gas is currently trading at $2.894 per DTH
Too hot to fly. Too hot to fly? You know it just takes me a bit to wrap my head around that statement. Most of us know that electronics can have problems with the heat. They eventually had to put air conditioning into our tanks, not because of crew comfort, but because the electronics that ran everything from the laser range finder to the gun stabilization system would fry out after a few days in the desert. But too hot to fly?
Fortunately, that extreme heat is confined into the US southwest, although some of it was creeping into west Texas and the plains states today. The east continues to be cooler than normal thanks now to Tropical Storm Cindy. Nevertheless, I was piqued by a gas market comment that I have seen every week for about six weeks now. “Milder weather should allow natural gas inventory building to ramp up the pace.” We certainly got a hint that this might happen the week of Memorial Day, but today’s storage build of +61 BCF has to be characterized as another disappointment regardless of “expectations”.
As I mentioned last week, people have been playing up the production gains out of the Permian and the Marcellus basins. Those statements are usually accompanied by a comment about how we have doubled the number of drilling rigs in the last year. But here is the chart that tells the rest of the story:
As you can see, we have indeed doubled the drilling rigs, but that still puts us well below the number of rigs that were drilling when we were adding abundant new supplies. Moreover, while drilling rig efficiency is improving it is not improving by the leaps and bounds of a few years ago. So again, where is all of this new gas production the market is expecting and when will it show up? Or is any new production going to be soaked up by the increasing commercial, industrial and export demand we are seeing? As always, the weather will play a major factor, but it continues to be a wild card. NOAA is still forecasting a hot July, but then again it forecasted a hot June and we have seen how that has worked out for just about everywhere except the US Southwest.
On Monday the market gapped lower on forecasts for continued mild weather, but it has since struggled to build momentum for a further move in either direction. Again, while today’s injection was slightly above expectation it lost ground against the year-on-year inventory and the 5 year average inventory, so the July contract closed today at $2.894 /Dth, up 0.1 cents for the day.
This week’s move lower translated into the 2017 summer strip losing 8.9 cents to $3.031 /Dth and the 2017-18 winter strip declining 11.3 cents to $3.174 /Dth. Meanwhile, the 2018 calendar strip dropped 6.8 cents to $2.964 /Dth while the 2019 calendar strip gained 0.2 cents to $2.870 /Dth.
On the change chart we can see that the front of the curve has now moved below the February 23rd low that we had been tracking. There are at least two more things to keep an eye on in coming weeks. First, the last two weeks of June last year were hot with very low storage injections. If we do not see significant additions to inventory versus last year in the next two weeks the bears are going to have a serious problem. Second, albeit a longer term consideration, is that oil closed at $45.22 a barrel today which is well below the $50 that analyst claim the shale oil plays need to be economic. Why is that important? Oil shale production is important because a lot of associated natural gas comes from those oil fields. A number of the Houston analysts have said that we will not have real growth in gas production with oil below $50 a barrel.
Do you ever feel like you are playing roulette and your not sure where that spinning wheel is going to land? Stay tuned.
Have a great weekend.
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