Conclusion: Consistent with our thesis of oversupply of natural gas, inventory in the U.S. continues to build. We tactically covered our short natural gas position on November 1st, but continue to have bearish view on Natty.
Consistent with our thesis, as articulated by Energy Sector Head Lou Gagliardi, natural gas inventory in the United States continues to build due to a mismatch of supply and demand. According the Energy Information Administration, natural gas inventories grew by 67 billion cubic feet for the week ended October 29th. This was slightly more than analyst expectations, which looked for a build of between 61 and 65 billion cubic feet.
As we’ve highlighted in the chart below, supplies in the United States are now about 10% higher than their 10-year average and up about 1% year-over-year. Interestingly, according to the EIA, inventory in the producing regions, which includes Alabama, Arkansas, Kansas, Louisiana, Mississippi, New Mexico, Oklahoma, and Texas, was up 2.4% and is now 20% above the 5-year average. This data point clearly underscores our view that producers are overproducing.
Furthermore, the EIA provided the following comment today as it related to supply and demand balance:
“Though supply still exceeded demand during the Thursday-to-Wednesday report week (October 28-Nov 3) as reported by BENTEK, the supply/demand balance continued to tighten as demand rose while supply stayed flat. Total supply rose less than one half of one percent during the report week, as production and liquefied natural gas (LNG) sendout rose slightly. Overall, Canadian pipeline imports fell by an estimated 2 percent, but declines in imports to the West and Midwest were partially offset by a 17-percent increase in imports to the Northeast. Total consumption rose 7 percent, bolstered by a 30-percent increase in residential and commercial consumption, and partially offset by a 9-percent decline in consumption of natural gas for electric power generation. Compared to last year, total consumption is 2 percent higher and total supply is 6 percent higher.”
The two key takeaways from this statement for us are that electrical consumption is down 9%, which likely indicates soft economic activity, and the continued imbalance of consumption growth (2%) and supply growth (6%).
Additionally, the outlook for production in the United States continues to suggest further growth based on rig count acceleration. Currently, there are 1,672 rigs working in the United States, which is 600 more year-over-year. While there is more rig activity chasing liquids (oil), according to Baker Hughes almost 58% of the operating rigs focus on natural gas and almost 57% of those rigs are horizontal.
More rigs and more horizontal drilling means more supply. It is that simple.
Daryl G. Jones