Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

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Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


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US NATURAL GAS- BUILDING ENTHUSIASM © Leo Haviland, April 16, 2012

Assuming normal weather, the current severe United States natural gas oversupply situation will become quite a bit less so in days coverage terms as inventory build season 2012 proceeds (and as winter 2012-13 draw season occurs). This will support prices. However, unless more substantial production cuts actually emerge, significant natural gas oversupply relative to historical averages probably will persist through winter 2012-13. Containment risks for the 2012 build period have not disappeared, but they probably will be less severe than many believe.

The average build from end April to end October is around 1784bcf. Days coverage rises about 29.4 days. A few years had slight additional builds into calendar November. For example, inventories peaked at 3837bcf on 11/27/09 (weekly statistics). The 2010 high was 3840bcf on 11/ 5/10. And in 2011, 11/18/11’s 3852bcf exceeded 10/28/11’s 3794bcf.

On 4/6/12, working gas inventories were 2487bcf, soaring 55.5 percent over the year-ago week’s 1599bcf. End April 2012 surely will represent a new record for that calendar month in bcf terms. Suppose end April 2012 stocks reach 2600bcf. Relative to full calendar year forecast demand of 69.6 bcf/day (EIA’s Short-Term Energy Outlook;“STEO”; 4/10/12; Table 5a), days coverage will be 37.4 days (2500bcf equals 35.9 days). This will break through 2006’s “recent history” 32.7 day ceiling of 32.7, though it falls slightly beneath 1991’s high for the 1990-present period. April 2012 leaps above April 2011’s 1789bcf and 26.8 days coverage. Compare end April all-time lows of 854bcf and 13.8 days coverage (1996).

Looking forward, depressed natural gas prices relative to coal probably will generate substantial fuel switching from coal to gas. Thus the stock build from end April to end October 2012 may be less than average.

Lows in arithmetic builds from end April to end October (1990-present) are 1991’s 1332bcf and 2002’s 1457bcf. The tiniest days coverage increase was 2002’s 23.1 days. In 2003, stocks ballooned a record 2237bcf over these months; 2003’s 36.7 day rise in coverage remains the record. The calendar 2011 inventory rise was 2015bcf, or 30.2 days coverage.

Suppose end October inventories are 4050bcf. That will represent 58.2 days coverage (4050bcf divided by calendar year 2012 average daily consumption of 69.6bcf per day). This is a bearish amount, for it is about 4.5 days above the 53.7 day end October average. However, it is two and one-half days below end October 2009’s 60.7 days. At 4000bcf, days coverage is about 57.5 days; at 4100, days coverage climbs to 58.9 days.

Numerous supply/demand variables of course intertwine to affect natural gas price levels, trends, and relationships. Perhaps current high inventory levels will continue to pressure prices, especially in nearby months. However, for NYMEX natural gas (nearest futures continuation basis), remember the major bottom in September 2009 (9/4/09) was around 241. Assume that end October 2012 US inventory appears headed for “about” 57.5 to 58.9 days coverage, less than October 2009’s 60.7 days. Then all else equal, for NYMEX natural gas prices “around the time of the later months of 2012 build season” to sustain lows under September 2009’s price depth, there probably will have to be noteworthy containment problems.

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Natural Gas- Building Enthusiasm (4-16-12)