Schork Oil Outlook: Mercury Creeps Up—But NatGas Consumption Trends Down
Founder and Editor, The Schork Report
Earlier this week we ushered in the summer solstice, which also means that the “dog days of summer” will soon be upon us. The name originated with the ancient Greeks, Romans, and Egyptians; they believed that Sirius, the dog star, which rises simultaneously with the Sun during this time of the year.
In this vein, injections will begin to ebb over the next several reports. The U.S. natural gas refill season can be broken down into three distinct seasons. In the first season, which generally begins in earnest four weeks prior to the U.S. Memorial Day holiday (early May) and lasts through the 4th of July holiday, is when we see the largest injections of the season, i.e. a 91 Bcf per week average ±1.8 Bcf. Current injections are averaging 90 Bcf since May 7.
Average injections drop to 57 ±3.4 Bcf through the second phase of the injection season which takes us through the dog-days of July and August and lasts through the U.S. Labor Day holiday (first Monday of September). Thus, if we get a hot July/August, regardless of producers apparent willingness to sell into a +$5 market (see the latest CFTC report), we can expect average weekly injections to fall below 60 Bcf per week.
The third and final phase of the season takes us through the peak hurricane season in September and October. Average injections rebound to 69 ±2.4 Bcf per week as temperatures ease and utilities top off storage ahead of the winter.
Bottom line, the nearby fundamental picture is as good as it gets for the bulls. Gas rig counts in Canada and the Lower 48 are low, we are seeing an early start to what is forecast to be a heavy hurricane season and the weather in key markets has been hot, real hot.
So how come NYMEX gas is stalling above $5?
The Schork Reporthas highlighted one reason, i.e. the net disposition of producers, merchants and processors on the NYMEX (per the CFTC) is now at the widest level, 25,294 net short contracts, since gas peaked at the coldest point of the winter in late January/early February.
More to the point, underground caverns, mines and aquifers are brimming. The 5-year average surplus (interpolated) now stands at 309 Bcf or 13.4%. Since the start of the decade natural gas demand from the Grid through the dog days averaged 24.2 ±0.7 Bcf per day. As such, the current overhang in underground storage covers an extra 12 days of a typical summer’s a/c load.
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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.