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Schork Oil Outlook: Nature Thwarts NatGas Bulls ... So Far

Difficult summer for gas refills...

The U.S. natural gas market is now on the cusp of the third and final phase of this year’s refill-season. After this weekend’s holiday, injections into underground storage will begin to ramp up from the summer doldrums of Phase 2. In this vein, there is plenty of room left in storage to stuff molecules into the ground through October.

The U.S. natural gas refill-season can be broken down into three distinct phases. In the first phase of the season, which generally begins in earnest four weeks prior to the U.S. Memorial Day holiday (early May) and lasts through the 04th of July holiday, is when we see the largest injections of the season. Since the start of the decade injections up through June averaged 10.7 ±0.4 Bcf/d.

Injections this year averaged 11.9 Bcf/d or 10.9% above the average of the previous nine seasons. As a result, the overall surplus at the end of June was 21½% or 485 Bcf… and that was despite enduring the 8th warmest June in the U.S. on record. Thus, as we approached the dog-days of summer or Phase 2, supplies were in good shape… fortunately.

The second phase of the season, July and August, generates the lowest storage build of the season as injections compete with gas-fired a/c load. In a typical Phase 2 injections fall to 9.1 ±1.8 Bcf/d. However, as we all know this was not a typical summer. Temperatures in July were brutal, especially in heavy population density states in the East. For the nation as a whole July was the 17th warmest on record according to NOAA and the May-July period was the warmest ever for the Northeast.

Cooling demand in August was very high as well and combined with the pullback in production that was analyzed in past issues of The Schork Report, injections suffered as a result… really suffered, i.e. 38% (!) below the 2001 to 2009 average. Thus, a 21½% surplus that existed in June narrowed to 9.6% in August (according to preliminary estimates for July and August).

The third and final phase of the season takes us through the peak hurricane season in September and October. Average injections rebound to 10.6 ±0.5 Bcf/d in September as temperatures cool and then fall to 6.6 ±0.8 Bcf/d in October as utilities top off storage ahead of the winter.

To date we are seeing hurricanes… along the Atlantic Coast. Not much help thus far for the bulls, but that can always change. In the meantime, should injections continue on the anemic pace we saw in Phase 2, then we are still on track to end this season at 3.42 Tcf, 1.7% above the 2001-2009 average. Not bad, but not great, but certainly enough to get us through the winter, even last winter. On the other hand, should injections retrace back towards seasonal norms we will be looking at between 3.59 and 3.65 Tcf at the start of the winter.

That’s a lot of gas, not matter how you slice or dice it.

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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.