Goldman says this:
Inventories are on track to build well into
November.
Weekly fundamentals highlights
US natural gas inventories built by a substantial 84 bcf last week to 3,028 bcf, which is 133
bcf below year-ago levels and 25 bcf above five-year average levels. The build continued the
recent pattern of a counter-seasonal acceleration in builds, as weather has warmed
significantly since the beginning of the month. Significantly colder weather in the Northeast
this week, however, should help reverse this trend.
Weekly focus
• Last week, the weather-adjusted inventory build remained weak, pushing the four-week
average build to 3.9 bcf/d above normal. If this weakness in the underlying balance is
sustained at current levels, we estimate that inventories would continue to build eleven
days into November on normal weather (versus normally drawing on November 1st).
This scenario would push the inventory level to a peak of 3,140 bcf before winter draws
begin, just 30 bcf below last year’s peak record level.
• At these inventory levels, injection difficulties typically become more prevalent,
increasing the likelihood that surplus gas, which cannot find a home in storage, exerts
potentially severe downward pressure on cash and front-month prices. Such injection
difficulties also have the potential to slow inventory builds relative to normal. While such
a slowdown may leave inventories short of the 3,140 bcf suggested by the pace of the
recent build, such slowing would actually signal a severe surplus in the market rather
than an improvement in the underlying balance.
Hedging recommendations
We believe that natural gas prices will remain range-bound, with residual fuel oil prices
providing a floor and distillate fuel prices providing a ceiling, until significant and
sustained supply growth eases the chronic imbalances in the US natural gas market.
Given that calendar 2004 natural gas swap was trading at $4.93/mmBtu on October 23,
2003, on the upper-end of this range, we believe the upside to calendar 2004 natural gas
prices is limited. Reinforcing this view is the relatively high level of oil prices and cracks,
which are currently trading above our forecasts. Accordingly, we believe oil price and
crack risk for calendar 2004 is skewed to the downside, suggesting the distillate price
ceiling for natural gas may decline, with limited upside. We therefore recommend selling
calendar 2004 natural gas, but would advise using option-based strategies to preserve the
potential for upside participation. |
