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Gut Check: An Examination of Winter Res/Com Demand

December 21, 2016 | By Jack Weixel

In the natural gas market, there are 151 days of winter. Starting on November 1 and lasting until March 31, the traditional winter season is widely anticipated by the market as a source of elevated demand, primarily driven by residential and commercial (res/com) gas use that is affected by weather. In this edition of Get the Point, we’ll examine res/com demand, paying particular attention to levels of demand this winter to date, in the context of winters past.

Winter res/com demand is the most important factor that determines the level of storage inventory in the ground for the subsequent summer season and the beginning of the next winter season. Last year’s winter proved that when weather does not show up, the rapid erosion of price due to elevated storage levels can be significant. Conversely, a winter like the polar vortex winter of 2013/14 can diminish storage levels to unprecedented lows, sustain higher prices and extend a production rally for multiple succeeding seasons.

As shown in the graph below, the winter-to-date for 2016 has deviated greatly from the 5-year average trend. Already this winter, we have witnessed intense periods of high res/com demand, but also periods when many in the market were left wondering whether res/com demand would even show up. 

Res/Com Winter 16 to-date vs. 5 Yr Avg (Bcf/d)

Source: PointLogic Energy Supply & Demand

Res/com demand levels during the first five weeks of winter through December 1 were well below the 5-year average start of previous winters 2011 through 2015. November 2016 res/com demand averaged 22.6 billion cubic feet per day (Bcf/d), compared to 25.1 Bcf/d in November 2015.

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But that was no bellwether for what was to come. The past three weeks have seen a surge in res/com demand driven by multiple arctic cold fronts that charged through the Lower 48 U.S., leaving frozen cities and overtaxed furnaces in their wake. December 2016 to-date res/com demand has averaged 43.3 Bcf/d, compared to just 29.9 Bcf/d for December 2015 to-date. December 2016 has already registered four days when res/com demand exceeded 50.0 Bcf/d, a feat that was achieved only 12 times in winter 2015/16 (and not until the first week of January). The polar vortex winter of 2013/14 had December to-date res/com demand of 43.7 Bcf/d and 45 days of res/com demand above 50.0 Bcf/d.  

However, res/com demand levels can turn on a dime if cold weather shows up and heating degree days (HDDs) begin to accumulate, particularly in highly populated regions of the country. Past performance is no guarantee of future results, though it can be helpfl when short-term weather models provide advanced warning of the potential demand afoot. 

Res/Com Demand in Bcf/d

Source: PointLogic Energy Supply & Demand

A swing in HDDs precipitates an increase or decrease in demand that affects the total amount of gas withdrawn over a season. In the polar vortex winter of 2013/14, an increase of 7.4 Bcf/d in res/com demand over 151 days meant that res/com alone (ignoring other supply and demand factors) accounted for an incremental 1,117 Bcf of gas withdrawals versus the prior year. The opposite effect occurred this past winter, when an 8.2 Bcf/d decline over 152 days (leap year) resulted in 1,246 Bcf of excess gas that the market had to find a way to deal with.

Impact of Res/Com Demand on Storage and Price

Impact of Res/Com Demand on Storage and Price

Source: Energy Information Administration (EIA)

Expectations for Winter 2016/17

The polar vortex winter of 2013/14 caused so much havoc to storage levels that production had room to grow for the balance of 2014 and all of 2015 (nearly 20 months), in order to replenish storage levels that bottomed out at 824 Bcf in March 2014. While gas production also rallied over 2014 and 2015 due to the rapid growth in associated gas production (with oil prices over $100 per barrel) and the increased ability to move gas out of the Marcellus due to pipeline expansion and reversals, diminished storage levels helped accommodate this growth. 

The warm and docile winter of 2015/16 had the opposite effect -- production in summer 2016 was down 1.9 Bcf/d compared to summer 2015 levels. While current prices have rebounded to levels not seen since the summer of 2015, a cold winter in 2016/17 could encourage more price support, while a warm winter could prove devastating for producers hoping for a rally. So what is the expectation?

At the end of August, long-range weather forecasters generally expected a “normal” winter, encapsulated in the map below from the NOAA Climate Prediction Center. This graphic paints a picture of how temperatures might look over the months of December, January and February -- the heart of winter 2016/17.

Three-Month Outlook Temperature Probability

Source: National Oceanic and Atmospheric Administration, Climate Prediction Center, Aug. 18, 2016

In the above graphic, over half the country might expect “A,” or above-average temperatures over the three-month time frame. Meanwhile, “EC,” or equal chances of cold or warm temperatures relative to normal, are evident across most of the population-heavy Midwest and Northeast, with a spot of below-average temperatures in the upper Midwest. The map appears to depict a “normal” winter, and most other forecasters at the time generally concurred.

A more recent forecast map (Nov. 18) for December through February from The Weather Company (aka the Weather Channel and WSI, now owned by IBM) looks like this:

Temperature Forecast December-February

Source: WSI, the Weather Company, Nov. 18, 2016

The temperature outlook for large parts of the Lower 48 has shifted substantially. In this rendition, the middle part of the country is forecast to have “A,” or an above-average chance of warmer temperatures, while the East Coast and West Coast can expect normal temperatures over December, January and February. In the long-range forecasting business, a lot can change over the span of three months, especially with the U.S. transitioning from a strong El Nino in winter 2015/16 to a modest La Nina in winter 2016/17.

Given what we now understand about long-range forecasting and with real, timely res/com demand data for the first one-third (51 days) of winter 2016/17, let’s look at some scenarios that will show us where res/com demand might end up for the winter 2016/17 season over the remaining 100 days.

More consistent short-term forecast data through the end of December (1-15 day forecast data) exists from our partners at Statweather – this data has been incorporated into the chart below.

Winter 2016-17 Res/Com Scenarios (Bcf/d)

Source: PointLogic Energy Supply & Demand

As the chart implies, a range of possibilities still exist. The warm start to winter in November was effectively made up for in December; so much so that every scenario has winter res/com demand above winter 2015/16 levels of 32.8 Bcf/d.

The red line shows what would happen if polar vortex winter conditions would persist through much of January and February, and then winter 2016/17 could average near 39.5 Bcf/d of res/com demand. The green line assumes a more modest winter similar to the one experienced last year, with a winter 2016/17 res/com average of 34.1 Bcf/d. The delta between the two scenarios is wide, representing a net 5.4 Bcf/d swing, or 815 Bcf, in potential inventory change from November to March. Extending the 5-year average of res/com demand through the end of March yields winter 2016/17 res/com demand of 36.0 Bcf/d.

In Conclusion

Weather forecasting is a difficult business, as is predicting an accurate final res/com demand number for winter. PointLogic assumes an 8-year weather-normalized and population-weighted input variable for its temperature calculations, and these help us generates raw demand numbers from pipeline flows. For all the variance in winter, 8 years is a pretty safe assumption to capture “normal” weather that could possibly arise in any given winter – but it will invariably be wrong or inexact because normalcy is hard to grasp when dealing with the myriad factors that influence demand.

Our Two Season Balanced Supply and Demand Forecast calculates that 8-year normalized res/com for winter 2016/17 equates to about 36.6 Bcf/d of demand, slightly above our 5-year normal case (36.0 Bcf/d) that incorporates demand for the final 100 days of winter. We believe that res/com’s resurgence this winter versus last winter will cause an increase in storage withdrawals, and cash prices will follow suit, remaining stronger than a year ago. How much stronger is highly dependent on whether “normal” holds, or if it varies by a few Bcf each day.

Stay tuned to PointLogic’s real-time assessment of res/com and pay close attention to swings in weather as the rest of the story unfolds through March. 

 

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