Industry analysts whose predictions were almost entirely out of the money on last week’s storage injection have offered various explanations for the big dip in the numbers announced by the Energy Information Administration (EIA). The consensus of prognosticators had centered around a mid-80s Bcf build, so the 72 Bcf that EIA said was injected into underground natural gas storage for the week ended July 16 came as a shock.
Not only was the injection number much lower than predictions, but the bullish build came after two back-to-back 100+ Bcf injection weeks. The EIA’s 72 Bcf injection report Thursday came on the heels of a 109 Bcf report and a 108 Bcf report for the weeks ended July 2 and July 9, respectively.
“In storage, these strange anomalies will happen from time to time,” said Stephen Smith of Stephen Smith Energy Associates, who was looking for an 81 Bcf build. “I think people were a bit confused by the two prior weeks because they were very strange.”
Smith noted that the 109 Bcf build came during a “cool week” according to his own weighted average cooling degree days. He said the 109 Bcf week showed cooling degree days in the low 40s. During the 108 Bcf injection week, cooling degree days were in the low 60s, representing a 50% increase from the prior week.
“Both of those numbers cannot be right. Something is spurious,” he said. “You can’t have 50% more degree days in the middle of summer one week compared to the last and still get the same storage build. The interpretation of those two weeks was confusing to most people. The implication of it was that demand was just very, very weak and more gas was going into storage, so everybody kind of cranked in a weaker demand concept into their models.”
Smith’s theory is two-fold. “One, you had the grand forecast of a hotter than normal summer, which week by week was not panning out. Then you had signs that demand was even weaker than the weather deviation from expectations. Those were both things that were kind of driving the market in a pessimistic way.”
As a result, Smith said he believes that most people scaled down their demand numbers, but by too much.
“I think the 72 Bcf injection might have been slightly anomalous the other way,” he said. “In other words, things weren’t as bad for demand as the 108 Bcf suggested, which led to the upper 80s forecast. Nor is it as good probably as the 72 Bcf [implies]. I think we are somewhere in between.
“Ignoring weather, I think demand for the summer is probably a bit weaker than expected and it is certainly weaker than the indications of spring, when you were starting to see some pretty good electricity gains year-over-year. I think that has tapered off a bit.”
Smith said he believes that the weaker demand, which allows for greater storage injections, can be attributed in part to the slowing down of the U.S. economy. In addition, he noted that when natural gas prices are steadily in the $6 range as they have been., some of the country’s remaining gas-intensive industries will tend to cut back.
Weighing in on the storage data collection methods applied by the EIA, Smith said “I think the numbers are better now than they used to be. There aren’t quite as many bad surprises. I think the DOE has improved its sampling.” He added that there are some things that are going on that make the storage forecasting difficult. However, he noted that these things are not really the data collector’s fault.
“It has to do with the timing of storage injections,” he said, noting that “you do have some flexibility and some limitations in terms of what kind of storage injection goes on every week. It’s not simply the difference between supply and demand.”
As an example, Smith said a cool spell could build pressure up in the natural gas pipes headed for injection. “It can’t necessarily all get injected in the week in which the pressure builds up. If you can’t get all of the injections in the week in which the pressure builds up, then you’ll get some ‘catch-up’ injections the next week. That’s what leads to the massive variability in the storage number as compared to just looking at the weather effects.”
UBS analyst Ronald Barone agreed that there are some conflicting signals. “Amid returning demand from holiday related shutdowns, increased nuclear outages (which averaged 2,446 MW versus 1,336 MW in the prior week) and a 7% increase in U.S. electric output (to 85,724 GWh from 79,811 GWh in the prior week), the industry posted a moderately smaller storage refill last week. Despite very favorable inject now/sell forward arbitrage opportunities, the EIA reported a 72 Bcf storage injection.”
This lower injection resulted in “effectively cooling recent market suggestions of supply loosening (at least for now) stemming from the past two weeks of consecutive triple-digit injections.”
Barone noted that questions remain as to how much influence “lumpy data collection” and “holiday related shutdown noise” influenced the recent figures. According to the analyst, prices in July have sloughed off a little from June. “All else equal (which admittedly is not the case when analysing these complex markets), this would suggest that weather-normalized demand should be increasing. Overall, we believe several additional weeks worth of data are required to make sense of these conflicting signals.”
Tom Saal of Miami-based Commercial Brokerage Corp. said that while he was looking for a higher number, the 72 Bcf build fit historically. “If you look at historical patterns, there is usually a drop-off during the month of July, a little pick-up for labor day and then it drops off again.” He noted that last year during the weeks in question the industry saw big gap injections of 147 Bcf, 95 Bcf and 77 Bcf. “There shouldn’t be any head scratching,” he said.
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