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What Difference Does April Make?

April 14, 2016 | By Jack Weixel

In this week’s Get the Point, we’ll examine natural gas supply, demand, price and storage inventory data for the month of April to see what kind of a difference this month makes for the summer injection season. Does a cold April spell relief for low prices? Does low demand in April sink prices even further? April is just one month out of seven through October that constitutes the summer injection season for natural gas, but as we’ll explore in the analysis below, this month oftentimes sets the stage for summer and winters to follow. 

This April, the U.S. began the month with 2,480 billion cubic feet (Bcf) of natural gas in storage, a new record that narrowly eclipses the prior season starting inventory record of 2,474 Bcf in April 2012. With this excessive amount of gas in storage, the market can expect some sort of rebalancing over the course of the summer, and that rebalancing act will likely start now.  

Historical injection patterns during April are detailed in the graph below. Weekly data from the Energy Information Administration (EIA) has been charted with consideration that some days of March or May are included in Week 1 and Week 5 data, respectively. The month typically starts out with modest injections, which quickly ramp up as ambient weather conditions create only a marginal need for gas in the residential and commercial sector (res/com). 

Historical Pace of Storage Injections During April

Source: PointLogic Energy and EIA

The net sum of injections during the month can vary greatly, as shown by the 5-year range – with April 2012 showing a net injection of only 134 Bcf, compared to April 2015 establishing the 5-year high-water mark of 324 Bcf. This begs the question of whether the starting mark of storage dictates the pace of injections during the month. 

As we’ve noted, in April 2012 the prior record inventory level of gas in the ground was 2,474 Bcf. Last year, in April 2015, at the start of Week 1 on March 28, the U.S. had only 1,461 Bcf in storage, or over 1,000 Bcf less than 2012. Then again, in April 2014 the U.S. had a paltry 824 Bcf in storage as of March 29, but only injected a net of 231 Bcf through Week 5. The prior 5-year average starting inventory position for April 1 is 1,606 Bcf, only slightly higher than April 2015 levels. 

Perhaps then it is not entirely the starting position of storage that dictates the pace of injections in April. Could it be more reflective of demand, which is heavily influenced by the weather? Or of the relationship between supply and demand that dictates the pace of injections? Data for the past five Aprils are included in the table below.

 

Source: PointLogic Energy and EIA

Going back to 2011, total supply in April has increased each consecutive year due to the substantial rise of dry gas production available to the market. Total demand has also increased every year but on a much slower trajectory, of only 6.5 Bcf/d, or an average of 1.3 Bcf/d per year. Supply has increased by nearly double that pace, at 12.1 Bcf/d over 5 years, or 2.5 Bcf/d per year.

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With supply outpacing demand by nearly a 2:1 ratio, you might expect that in the absence of any significant new source of demand, supply available would directly correlate to the pace of injections. This was certainly true in April 2015 (and explains a good deal of the storage fill pattern for last summer), when production averaged 73.9 Bcf/d and was supplemented by 6.1 Bcf/d of Canadian and LNG imports. The inverse situation is also true - in April 2012, with production averaging only 64.4 Bcf/d, supplemented by 5.7 Bcf/d of Canadian and LNG imports, injections into storage only totaled 138 Bcf for the month (or 4.6 Bcf/d). With demand levels closer to April 2012 production levels and the balance of gas available to inject into storage lower, injections plummeted by more than 6.1 Bcf/d compared to April 2015. As production increased by a greater ratio than demand between 2012 and 2015, the inability of demand to match supply resulted in stronger injections during the month. 

The price of natural gas also affects the pace of storage injections during the month. An interesting fact that plays out is that while supply and demand may affect cash values during April, spread values between April cash and forward winter months do not necessarily incentivize early injections. In April 2012, the January 2013 natural gas contract was trading about $1.22 per MMBtu higher than cash, while in April 2015, the January 2016 natural gas contract was trading only about $0.59 per MMBtu higher.

Regardless of the implied intrinsic value of storage at these two points in time, a higher time spread did not necessarily lead to higher rates of injection. In April 2012, perhaps the market was waiting for winter to approach to inject more gas, but by later in the summer, as high demand reduced storage inventories, spreads narrowed, not widened as would have been expected. In April 2015, the market injected plenty into storage, perhaps in anticipation that a flat natural gas market would tighten the winter spread as the summer wore on. In April 2015, it appears folks who injected gas into storage got the right message as spreads tightened last summer and the forecast for winter weather and price eroded later in summer. 

What’s in Store for April 2016?

What about this year? Through the April 12, 2016,  dry gas production in the lower 48 has been on a predictable slide (as we foretold in our V-Shaped Outlook Get the Point last month) averaging only 73.8 Bcf/d. Canadian and LNG import gas add another 5.5 Bcf/d, putting total supply at 79.3Bcf/d, or 0.8 Bcf/d behind last April’s total supply number. 

Demand is coming in at an average of 73.9 Bcf/d, with stronger early April res/com compared to last year carrying the load. Below is a to-date comparison of April 2016 versus April 2015.

Source: PointLogic Energy

The supply and demand comparison chart shows that overall, the market is now short, or tightening, by 7.8 Bcf/d this month compared to the same period last year. This indicates that storage injections are, on balance, lower than those seen in April 2015 (a comparison view chart will be available to PointLogic Energy clients as a new feature on our Market Module page, so if you’d like to follow April 2016 please log in here). For to dry production, April 2016 will likely be the first month when production has declined vs. the prior year month since January 2013.  

PointLogic’s forecast of supply and demand for the remainder of April shows the net 7.8 Bcf/d short position easing slightly as colder weather erodes over the next few weeks. Forecasts indicate that the month will remain short by about 4.7 Bcf/d compared to April 2015. This rebalancing act indicates that the pace of storage injections earlier in the month will increase slightly as demand wanes compared to last year’s level over the same time period.  

 Source: PointLogic Energy

Storage injections for the week ending April 7 are forecast to be about 10 Bcf, while out weeks indicate that the monthly storage injection total for April may only be about 140 Bcf; that level would be similar to the injection levels seen in April 2012.

Taking a look at prices, as of this writing, April cash stands at $1.88 per MMBtu, about 10 cents lower than the May 2016 prompt contract. The January 2016 contract is trading at $2.92 per MMBtu up from about $2.50, where it stood at the beginning of March. This is a spread of about $1.04, slightly lower than the spread in April 2012, but much higher than the $0.59 spread seen in April 2015.

Are market participants right in thinking that they should wait to inject gas into storage until later in the summer? As we discussed in our V-Shaped Outlook Get the Point, the notion of a winter price revival is evident. While PointLogic posits that demand will be strong throughout the summer, production is also still strong, as it was in April 2015. Should production fall throughout the summer, as we project, the absolute inventory number reached at the end of injection season matters less – more important is the perception in the market regarding the winter months and the price reflected on the forward curve.

Should the market keep lifting the price of January gas higher, i.e. more buyers hedging and as a fall in production would dictate, the incentive to inject gas early in the summer months such as April and May could decrease. However, if the cost to keep gas in storage for a few extra months is generally lower than the spread between April or May cash and August or September forward prices, injecting gas into storage now could provide consumers with a higher margin now. 

Timing in the natural gas market is essential. Had market participants injected natural gas and bought January gas last week, they would have enjoyed a spread of nearly $1.06 between April and January. This week, that spread is tightening slightly, as forward contracts have come off with  colder weather moving out of the Midwest and Eastern regions of the country. Next week, that spread may blow out once again. 

The real test of market participant’s mettle, particularly consumers of natural gas, will occur this summer, assuming that injections remain low throughout April. As demand rises throughout the summer, so goes cash prices and the cost of injecting gas compared to forward contracts in winter 2016-17. If, similar to April 2012, demand rises in the summer by extraordinary and surprising amounts, $1.00 + spreads could disappear. Conversely, if a rapid decline in production materializes and consumers are caught off guard, prices in both winter and summer will increase to incentivize supply. 

Stay tuned to Get the Point as we monitor this situation over the month of April and into summer, paying special attention to both demand and supply and their net impact on price and spreads going forward.  

 

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