With the winter season now in full swing, and a snowstorm looking set to bear down on the Northeast in time for this weekend, we thought that now would be a good opportunity to look at where we stand 2.5 months into the natural gas storage withdrawal season. Since the beginning of withdrawal season on November 1st, we estimate that 529Bcf has been drawn from storage, down almost 48% Y/Y from the 1,003Bcf of natural gas drawn over the same time period last year and down 25% from the five-year average of 703Bcf withdrawn over the same seasonal period. As a result of the slower-than-average withdrawal pace, the current natural gas storage level has narrowed the gap to the five-year average storage level, and now sits at the lowest deficit that it has over the prior twelve months. We view this as a relatively bearish indicator given that the gap between current storage and the five-year average was one point that commodity bulls had pointed to at the start of the season. Going forward, more wintry weather has the potential to reverse the dynamic, and if we assume that the storage withdrawals for the remainder of this winter occur at a similar pace as the chilly 2017-2018 winter season, we estimate that we would exit withdrawal season with 1,165Bcf of natural gas in storage. This level would be 14% below the exit level last year, and 31% below the five-year average exit level.
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Well, we’re only two weeks in but its been a good start to the year for the E&Ps with our Index +8% this week, outperforming the S&P500 by 530bps as WTI/Brent continued to move higher, finishing at $51/$60/Bbl. We know there is doubt about sustained outperformance after the head fakes of the past three years, but we believe crude oil continues to see strength and the producers so far, are adjusting well to lower prices, keeping our outlook positive on the group.
The two main drivers of domestic natural gas demand growth remain LNG and pipeline exports and while the former has come in greater than expectations, the latter has lagged. Mostly likely due to infrastructure delays south of the border, the annual growth rate of 0.4-0.5Bcfpd over the 2017-18 has slowed from 0.8-0.9Bcfpd seen in 2015-16 time period, but our base outlook calls for a rapid reacceleration though 2019 and 2020. There will be plenty of swings in export volumes as seasonal factors come into play, but the trend should start increasing through 2019 with our outlook calling for an average of 5.9Bcfpd this year and 7.1Bcfpd in 2020. Recently hitting the 5.1Bcfpd after a downswing in December, we’ll be looking to see how volumes flow over the next few months to determine how aggressive our 1.3Bcfpd growth assumption for 2019 might be and if we’ll have to revise our estimates lower as we’ve done the past two years. If we do, it means more downward pressure on domestic pricing and potentially pushes out the recovery of WAHA pricing that’s expected over the course of the next 12 months. See pages 3-4 for the weekly Mexico volume data and our forecasts.
Feels strange writing this after the last three months but our E&P Index was +9% vs. the S&P500 +2%, and WTI +6%. Even more strange was that after outperforming Wednesday and Thursday, our E&P Index outperformed again on Friday when the rest of the market was up 3%. Knowing how volatile the market has been over the past few months, we’re still on our toes, but this week was encouraging.
Quicker than it went up, natural gas came back down to end 2018 back where it started with front month now just below the 2.5-year average of $3/mmbtu. While volatility peaked over the last three months, it’s been amazing to see the tight band natural gas has traded in outside of this latest round trip, a result of short-cycle supply meeting up with long-cycle demand to balance the market, in our view. For the next few years though, we believe the equilibrium point is moving below the $3/mmbtu level, as the supply curve continues to move lower, meaning the U.S. can deliver the visible demand growth projected at a lower price. Periods of volatility will still exist around weather, which has clearly been exacerbated over the last three months due to below normal storage, but we continue to see a well-supplied market unless the Appalachia producers slow down or cold weather returns (we have the 6-10 day/8-14 day NOAA outlooks on page 3 showing the near-term warm weather to come). Our outlook remains $2.75/mmbtu in 2019 and $2.50/mmbtu with flat Permian natural gas volumes from 4Q18-3Q19.
For our chart this week, we look to Materials and Mining, two other commodity sectors to see how performance has compared against the backdrop of waning global demand growth concerns. While supply and demand fundamentals are different for each commodity, we found it interesting that the ETFs of each of the sectors has generally trended in the same direction, though Materials, lead by a 21% DowDuPoint weighting and is mostly chemical oriented, has performed the best over the past two months.
For the week, our E&P Index ended down 14% vs. the S&P500 down 7% and WTI down 11%. It was tough to look at the screen each day and have a sea of red, but it was an important week for announcements, both on the individual stock and macro level. One of those was from the Fed raising rates and suggesting more increases could come with the impact pushing the US Dollar lower by 0.5% this week. We’ve thought that a lower dollar would help support crude oil as it would allow for emerging markets to purchase the commodity at lower prices, though it’s become clear that any conversation on demand is all about the downside risks. Still, if the trend holds, we see it as a positive driver for crude oil.
Recently, Bloomberg began reporting daily net natural gas flows to the three main LNG export facilities: Sabine Pass, Cove Point, and the recently commissioned Corpus Christi. This flow data provides a relatively real-time depiction of the LNG sector’s flows, which is the critical driver of domestic demand growth near and long-term. With the Corpus Christi plant recently shipping its first cargo to Greece, total daily LNG net flows have been near or setting all-time records in recent weeks, with the 4.76Bcfpd reported on December 11th representing the new high point. Aside from the ramp at Corpus Christi, flows continue to be strong at both the Sabine Pass and Cove Point facilities despite the recent uptick in natural gas spot prices, which could potentially pressure near-term LNG margins if they remain elevated. At Cove Point, flows for the month of November rebounded to 0.8Bcfpd, a record monthly average rate, following the export terminal’s return to service in mid-October after three weeks of maintenance. Likewise, at Sabine Pass, flows also reached record levels in November, as the fifth train at the facility began first production in late October. See page 3 for historic and YTD flow data.
The holiday period is now upon us, though before our minds started wandering off, we were able to get in front of many investors and companies, getting some feedback on the Energy sector, crude oil, and stock ideas. For those unable to listen in, Sam, Blake and I hosted a webcast covering our top ideas, commodity views, key themes, and the impact of electric vehicles on crude oil demand.
In late November, the EIA released its updated Electric Power Monthly report which included power generation data through the end of September. For the month of September, total net electricity generation by utilities was 356,738 kMwh, up 6.2% YoY with increases seen in all segments (coal, natural gas, renewables). Though the long-term trend of coal-to-gas switching remains intact – overall coal generation is now down 5% YTD while gas generation is up 15% YTD – both segments outperformed our expectations by 6+% last month as Northeast electricity demand reached 12-month highs early in September but later fell to 12-month lows as temperatures cooled considerably exiting the month. Six of the seven U.S. regions surveyed by the EIA showed YoY growth in power generation, with the ‘West’ the only region to experience a YoY decline driven by 16% lower hydro and 5% lower coal generation that was somewhat offset by 13% growth in the region’s gas generation. The Southeast and Florida regions saw the biggest YoY increase in net generation as Southeast generation increased 12% while Florida jumped 11.5%. See page 3 for more details.
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