The Kobiona Monitor
Volume 2 / Number 5
June 23, 2020
Kobiona’s leadership has enlisted the help of our Market Intelligence Desk to craft this monthly publication to share major market dynamics impacting future power and gas prices. As every client’s situation is unique, we encourage you to review market movements with us to decide whether any action on your part could serve to lower your future costs or avoid known, coming increases.
If one were to only look at the EIA’s natural gas inventory report, an energy buyer might think they were in a great spot that might get even rosier by October. If gas storage was a company’s savings you’d say, “you’re having one heck of a run!” The problem is, the bank account alone wouldn’t be telling the whole story. To play out the analogy, if gas storage was a company’s savings, then production was how many orders it was fulfilling. You’d say those are down about 10% but trudging along. But if you dug in further, to rig counts, you’d see the problem. That the company fired its sales and marketing team months ago and wasn’t taking on any new customers. In energy, the equivalent is rig counts.
In this issue we’ll start with the rosy then show you the reality — so you don’t put your long-term budget at unnecessary risk over what may happen the next six months.
Storage Remains Impressive, Possibly On Track for Historic Season Finale
The EIA’s June 12th report showed the U.S. holding natural gas inventories of 2,892 BCF, 722 BCF (33%) above the same week last year and 419 BCF (17%) above the 5-year average of 2,473.
Compare the vertical, dotted line now (right) and a year ago (left) relative to the blue line (current inventories). A year ago stocks had just crept back into the 5-year range; now they are close to the top of the 5-year range and continue leaning higher.
Market analysts are beginning to speculate about scenarios where storage ends the injection season in October at record levels of 4.1 TCF (4,100 BCF). With production down about 10%, this will depend more on how fast demand ramps up across the U.S. as businesses open back up and how much gas is used for power burn (gas used for electric power generation) during a forecasted hot summer.
Rig Counts Reach Lowest Point Since 1940
According to Baker Hughes, as of Friday, June 19th, “the U.S. rig count fell 13 to 266, its lowest since the service company began keeping records in 1940. The decline was the rig count’s 15th consecutive decline and seventh consecutive record low.”
Reuters: “U.S. oil rigs fell 10 to 189 this week, their lowest since June 2009, while gas rigs dropped by three to 75, their lowest on record according to data going back to 1987.”
Why is this so important? Power and gas suppliers are trying to read the tea leaves as much as anyone. While they want to be competitive with their pricing, they don’t want to undersell futures at a discount just before they jump. Seeing rig counts at historic lows make suppliers very nervous, especially in regions like New England. They know if demand starts to ramp up, there would be a long lag before rigs can get back in place and production levels restored – it’s far from instantaneous. Worse, oil and gas exploration is taking a huge hit from the banks. When demand comes back, the dollars to finance putting them back out there will be harder to get and go to fewer players.
Production Down, Finds New Equilibrium
After weeks of production declines, natural gas seems to have leveled out at about 10% off the record production highs of late 2019.
NOAA Forecasts Hot Summer
NOAA’s 3-month forecast (July-Aug-Sept) predicts warmer-than-average temperatures across much of the U.S., especially in the Northeast and Southwest. A Top 5 summer for heat will drive up “power burn,” natural gas used for gas-fired electric power plants, and slice a chunk out of those plentiful natural gas storage reserves.
Additionally, buyers lucked out with no winter materializing for 19/20 and have been rewarded with historically-low power and gas future prices since mid-January. It’s highly unlikely we see a repeat of that. In Q3 and Q4 we very often see future prices lift as suppliers price in nervousness over winter.