Last week’s 120-Bcf increase in gas inventories is troublesome. Again we address that storage builds like those in 2019 can’t be tolerated for long.
The chart below shows that last week’s 120-Bcf injection into Lower-48 storage facilities was a departure from the recent trend. By this model, we would have expected a build of around 105 Bcf for the week that ended June 19. But, looking at history, an occasional 15-Bcf (or ~2 Bcf/d on our chart) is not unusual.
If this latest statistic from EIA is not an outlier, it could signal a return of supply (maybe associated gas volumes coming back from shut-ins?).
However, it’s possible that some weather calculations from government and vendors have improperly weighted different city temperatures. Slide the green arrows in the chart below to see how last week was cooler in many places than the previous week had been.
(Energy nerdiness: EIA’s surveys are done as of early morning on Fridays. Therefore, they don’t really include what happened each Friday, but rather, the Friday a week earlier. The chart below shows seven-day averages ending on Thursdays.)
Yet, even without this extra-large storage injection last week, the amount of inventory is growing too fast to handle.
The chart below shows how gas inventories came out of winter at very high levels. Therefore, even if the supply-demand balance is very similar to 2019, there is too much supply. This market is on a collision course with storage limits.
There are two main ways to solve this problem, if supply doesn’t change and social-distancing demand losses don’t diminish. Both require lower prices.
Create more demand. If prices move lower, sooner, extra demand would be created in the power sector. Lower gas prices enable gas to compete better with coal. Specifically, gas prices are at a level right now where gas could pick up demand in Texas. There are limits, though. Reach out to the AEGIS View team if you need details.
Call up more storage. You can’t create more storage capacity, but you can persuade storage operators to inject more into the more flexible caverns. Unfortunately, this is accomplished by a steep, temporary drop in prices (more precisely, by more contango in the curve). In the past, the September, October, and November contracts have been vulnerable to this kind of move.
There is a silver lining to this cloud. Usually, when gas storage is threatening to fill, discounts to natural gas prices happen in the current summer. The winter months and the following summer (which would be Summer ’21 in this case) are unaffected.
If your exposures to lower prices for the remainder of summer could cause problems in your budgets, the AEGIS Engage and View teams are here to help you alter your hedge book to add protection.
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