Schork: Looking at Finer Points of EIA Report
Another week, another better-than-expected EIA report, and … another sell-off in natty?
Yesterday’s 209 Bcf delivery was outside the 197 Bcf expected by analysts, yet prices sold off by 1.43%. We are becoming wary of connecting forecasts with market reactions. Consider that since the start of December, the delivery has exceeded analyst expectations for seven out of the ten reports. Yet on the day of the release, prices have fallen for eight out of the last ten weeks.
Further, as illustrated in the Chart of the Day in today’s issue of The Schork Report, one out of the two times that prices rose, the delivery was smaller than analyst expectations! Thus it should come as no surprise that the correlation between the increase/decrease in price and whether the EIA beat expectations comes to an essentially meaningless 0.0723. It seems traders simply do not care about analyst expectations right now. Or, to be less hostile, traders are becoming increasingly concerned with the breakdown regardless of an ostensibly bullish total delivery.
For instance, the 209 Bcf delivery comes well above last year’s 191 Bcf drop and the 2005-09 average of 144 Bcf. In size it ranks as the 2nd largest drop seen for this time-step (beaten only by a 224 Bcf drop in 2007 and 2004). The large draw comes despite heating degree days coming in 5.33% below last year, though they were 5.96% cooler than seasonal norms.
In aggregate the picture is similarly mixed. The cumulative change in heating degrees for 2011 comes to 0.67% cooler than last year and 0.77% cooler than seasonal norms. 2011’s cumulative delivery over the same period comes to 953 Bcf, 31.34% above the norm of 726 Bcf but 10.18% below the 1061 Bcf seen last year.
This may be a function of cold weather in the wrong places, and explain why prices sold off yesterday. As shown in today’s Report, the weather was 22.90% and 10.00% cooler than the reference week last year in the Mountain and Pacific regions, but warmer in key natural gas consuming areas such as the East and West North Central, which came in 3.21% and 2.09% warmer year-on-year. According to NOAA’s interpolated YoY comparisons, Illinois was 5.35% warmer and Indiana was 7.21% warmer.
Traders may have been hoping that heavy region-specific demand would make up for the general warmth. The spot markets bore this out – the PJM regional spot price (comprised of Columbia Gas Transmission’s TCO Pool, Transco Z6 non New York, Tetco M3 (NYC) and Dominion Transmission’s North Point Pool) shot to a $3.07 premium to Henry Hub a few days prior, its highest premium since late January.
Unfortunately for the bulls, the delivery in the East region came to just 110 Bcf, 5.17% below last year’s 116 Bcf delivery, and the PJM premium has declined to $1.494 as of writing. News is not all bad – the draw was safely above the 2005-09 average of 92 Bcf while the hangover from heavy summer demand has left total storage in the region at 1.06 Tcf, 7.05% below last year and 7.97% below the 2005-09 timestep.
Moving on, the Gulf of Mexico producing region reported a 67 Bcf delivery, almost double the 2005-09 average of 35 Bcf and well off last year’s 60 Bcf despite temperatures in the South Atlantic and the East South Central region coming in 21.33% and 24.88% warmer than last year –what gives?
According to the EIA, extremely cold weather led to freeze-offs at production facilities, “operational difficulties” on pipelines and shutdowns at processing plants. Thus total production was down 5% week-on-week and, according to EIA, production in the midcontinent has fallen more than 40% from late January levels.
This combination of weakened supply and increased demand helped the West coast report a 32 Bcf delivery, tied with a 32 Bcf drop in 1996 as the largest decline for the reference week on record. But keep in mind that last week saw a disappointing 18 Bcf delivery (below the previous year and the seasonal average) thus we may be seeing a true-up taking place.
The bottom line is that yesterday’s report was more bearish than first impressions would suggest due to disruptions and true-ups. With a warm 6-10 day outlook for much of the country, we will look to see production and processing resume, leading to smaller-than-expected deliveries as we exit the winter. Analysts at The Schork Report advise clients that we expect this to tighten basis spreads and put downward pressure on NYMEX futures.
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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.