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Schork Oil Outlook: NatGas Bulls Get Weather Boost

We are now approaching, in the first week of July, the end of the first phase (of three) of the U.S. natural gas injection season. To date, gas is getting injected at a comfortable pace of 9.6 Bcf/d. The Schork Report's seasonally adjusted trend predicted a 9.8 Bcf/d pace by this point in the first phase, but given that this season’s injections started a week earlier (19-Mar) than in a typical season, there is actually more gas in the ground, 742 Bcf, then our model forecast, 689 Bcf.

However, of late, abnormally strong cooling demand east of the Rockies has weighed on the pace of injections, i.e., last week’s report came in at a disappointing 88 Bcf and this week’s report — the Memorial Day holiday notwithstanding — might also disappoint in light of lingering strong a/c demand. For instance, week-on-week cooling degree days more than doubled in New York and rose by 18% in Florida.

As we set our sights on the second (and smallest) phase of the injection season the weather is cooperating with the bulls. But can it last?

The International Research Institute for Climate and Society’s (IRI) seasonal outlook (Jun, Jul, Aug) forecasts a 50/50 chance temperature in the Northeast and Mid-Atlantic can see above or below normal heat.

However, they also noted there is a “slightly enhanced” risk that markets east of the Mississippi will experience “extreme” (highest 15% of historical record) temperatures (this is further detailed in the Natural Gas section of today’s issue of The Schork Report).

The IRI is giving a 40% probability that temperatures in the Southeast and Southwest will fall into the warmest tercile of years. That is a concern given that Florida is the second largest cooling market for natural gas fired power generation, California is the third largest and Arizona is the fifth largest.

On the other hand, the IRI is making book at 40% that the temperatures in the Mid-Continent (inclusive of north Texas and Oklahoma) will fall into the coldest tercile. That’s potentially good news for bears in that Texas is the largest gas market in the U.S. and Oklahoma is the sixth largest.

In other words, as is the case with the price path of the summer gas market, it always comes back to Mother Nature.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.