NATURAL GAS – LAYING THE GROUNDWORK FOR A BOTTOM
DEMAND
The fundamentals continue to signal a potential end to the bears’ dominance in the market. While we continue to think that increasing US exports will help form a significant bottom, the more likely source should become apparent in the months ahead in the form of a cyclical rise in global demand.
There has still been no confirmation that a strong La Niña pattern is developing, and the historical evidence of below normal temperatures hitting North America in La Niña years is rather loose. However, we suspect that sub $3-dollar natural gas pricing and the general downtrend of the past six months have factored in a normal or above normal winter temperature pattern. With March Natural Gas prices down $0.63 (18%) from their peak in May, it is apparent that a mild North American winter is at least partially imputed into prices.
The long term bear market mentality in natural gas has also all but removed the idea that natural gas is an industrial commodity that should benefit from the ongoing recovery in the global economy.
Chart 1: Weekly Baker Hughes Rig Count - North American Natural Gas Rigs / Weekly
235 215 195 175 155 135 115 95 75
Source: Baker Hughes Rig Count: Baker Hughes
SUPPLY Supply side conditions remain in the bear camp, and global production has not faltered, but there are signs from US working gas in storage figures that supply has started to rebalance. We would also note that gas in storage has been below year ago levels for the entire year, and it is now 1.8% below the five year average. Perhaps even more importantly, working gas storage levels during the “shoulder” lower demand period have not rebuilt as much as expected.
We would also point to a chart of natural gas rig operating counts for confirmation that drilling activity has basically leveled out. That in turn should level-out production in the coming months.
30 | ADMISI - The Ghost In The Machine | November/December 2017
Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17
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