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.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

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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United States natural gas inventories in the key Producing Region at end winter draw season 2011-12 broke records for that time of year. At their low point on 3/9/12, Producing Region working gas inventory of 965bcf soared about 40.5 percent beyond winter 2010-11’s 687bcf and winter 2008-09’s 690bcf. The new record plateau for the end of draw season blasts 123.9 percent above the end draw season average (1994-2011). Producing Region inventories remain sky- high. On 4/20/12 they were 1041bcf. These jump 31.9 percent above last year’s level at this time (789bcf; 4/20/11). When 2012 natural gas build season ends this autumn, stockpiles probably will be lofty relative to long run history.

It is a truism that much can (and will) happen in the natural gas supply/demand battlefield and related theaters between now and the close of 2012 build season. Assume normal summer weather and continued modest American economic growth. Many marketplace generals declare that brimming inventories definitely or almost certainly will cause the Producing Region (“PR”) to suffer notable containment (“overflow”, “overcapacity”) problems this fall. Not only gas and power trading insiders, but also numerous Main Street spectators and assorted political guardians, fervently speak of the explosive gas production increase of the past few years. Because end winter 2011-12 PR gas inventory already stood high in arithmetic (bcf) terms, PR stockpile increases at around the average historical rate (1994-2011 era) during 2012 gas build season will stretch capacity in this key territory.

The PR indeed faces significant containment risks. By end build season 2012, these risks may burst into actual physical problems for much of the region. However, an alternative scenario is more likely. For the PR area as a whole, although the containment challenge probably will be a very close call, the region probably will scrape by. In any event, and as of now, an excessive inventory relative to available storage situation throughout the PR is significantly less certain than many proclaim.

Why question the widespread faith that the PR containment problem will be severe and widespread? Gas demand is rising. Substantial fuel switching from coal to natural gas has occurred and likely will continue. Despite the recent shale gas boom, as well as gas production associated with crude oil output in some locations, US natural gas production growth (overall output) may be less than sentinels forecast. Not only are prices still depressed. The US gas rig count has retreated dramatically.

A crucial consideration for the containment debate in the PR (and elsewhere) is the amount of gas storage available around the time of build season inventory peak. Admittedly, any current viewpoint on US gas storage capacity for the end of build season 2012 is quite conjectural. Nevertheless, relative to the most recent Energy Information Agency (“EIA”) estimates of demonstrated peak working gas storage capacity, sufficient storage in the PR probably has been and will be created to avoid a significant containment problem this autumn.

To assess the likelihood of severe containment problems throughout the Producing Region (and related natural gas price implications), the crucial issue therefore is how much natural gas storage probably has been and will be constructed (developed) since April 2011 (the most current EIA overview).

Despite some seasonal tendency for prices to finish a bear move (or end an important stage in a downtrend) in late summer or autumn, it does not follow that prices drop off a cliff from the preceding end winter (or early spring) without an interim rally. The price could make a low, rise for a few months, and then drop to make a bottom in (for example) late August or calendar September.

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Natural Gas Inventory- the Producing Region Story (5-1-12)

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)