US NATURAL GAS: BUILDING UP © Leo Haviland April 1, 2014

Assuming normal weather for spring and summer 2014, the NYMEX natural gas complex in general, including the nearest futures continuation benchmark, probably will trade in a sideways to rising trend.

United States natural gas inventory days coverage at the end of the 2013-14 winter draw season is very low arithmetically (bcf) as well as from the more important days coverage vantage point. However, winter ends every year. As the April/October build season will diminish short term fears of running out of natural gas, bears snarl that it becomes more difficult to sustain prices over 5.00. Yet for prices to remain under 5.00 over the upcoming summer build and winter 2014-15 draw seasons, much depends on whether 2014 gas production climbs by significantly more than two bcf/day year-on-year. The Energy Information Administration predicts a 1.8bcf/day output increase (Short-Term Energy Outlook, “STEO”, Table 5a, 3/11/14; next release 4/8/14). Some assert that fuel switching from natural gas to coal will occur in the key electric power sector in calendar 2014 if natural gas prices remain at current levels, and especially if they trend higher. The EIA believes 2014 electric power demand edges about .3bcf/day lower relative to 2013’s level (though calendar 2015’s ascends a modest .6bcf/day versus 2014). Keep in mind the still substantial net noncommercial long position in natural gas at present. All else equal, liquidation of a substantial part of that net length would weaken prices.

Yet analysis of the days coverage variable constructs a bullish case. Assume normal spring and summer weather. Suppose the EIA’s production estimate does not greatly miss the actual output boost. Then not only in the early months of build season, but also at its close at end October (or early November), days coverage for US natural gas inventories will remain well below average (typical, normal; desired). Admittedly, the United States natural gas inventory situation probably will become less tight over the course of winter 2014-15. If late autumn and winter weather is normal, working gas inventories days coverage probably still will be somewhat below normal during winter 2014-15 since they should commence draw season at very depressed levels.

The list of uncertainties surrounding natural gas supply/demand is long. But given that US gas stocks are very depressed now, a look forward at the probable working gas inventory situation for the next several months suggests the NYMEX nearest futures continuation contract probably will break into the 500/520 range over the next several months, and perhaps by the end of summer.

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US Natural Gas- Building Up (4-1-14)