I didn't know we were part of a cult?
By Kathleen McFall
kmcfall@ftenergy.com
In a vigilant effort not to be caught off guard this year, gas traders and analysts are watching the weekly gas injection and cumulative storage reports with a reverence rarely seen in the market's history.
"Although the market's obsession with the weekly AGA [gas storage] report has now reached unhealthy cult levels, the reality is the next several weeks worth of data points will tell a lot about the direction of prices heading into the potentially vulnerable shoulder month periods," writes Ronald Barone in a recent UBS Warburg research note.
"Has a cult status developed? Unequivocally yes," said Chris McGill, spokesperson of the American Gas Association (AGA).
While 'injection-watching' may be the industry's newest pastime, it's also, unfortunately, a sign of how volatile the market remains. With supply and demand so precariously balanced, traders are looking for any sign that might send the situation back into disequilibrium.
Traders and analysts are fixated on inventory reports because there is little real-time data that provides insight into supply conditions. Aggregate production data compiled by the government lags far behind the current week. Exploration and production companies' (E&P) quarterly reports provide only a slice of the market pie. Weather reports are indirect indicators of demand but say little about supply.
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"The market's obsession with the weekly AGA [gas storage] report has now reached unhealthy cult levels."
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Because storage reports are only one week behind, they are the most immediate data point from which traders can glimpse future supply and demand imbalances. However, AGA storage reports were not originally intended for this use. Recent events illustrate the potential consequences of relying too heavily on this data.
"It has evolved away from what the report was intended to do. It was meant to be a tool for supply planning and management," said McGill. "Nowhere in our methods or procedures is it suggested that our information should be traded on."
See-saw storage patterns
At the beginning of the summer, most pundits thought that it would be next to impossible to get natural gas storage volumes in shape before the beginning of the heating season. Surprising everyone, the injection rate has been at historic highs for more than two months now. It seemed clear that not only would the nation's gas in underground storage be adequate for the winter, it would exceed the traditional 3 trillion cubic feet (Tcf) usually deemed sufficient by November 1.
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"Nowhere in our methods or procedures is it suggested that our information should be traded on."
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And then came an unexpected curveball. Only 3 billion cubic feet (Bcf) was added to stocks for the week ending Friday, August 10, according to AGA estimates.
"This is the lowest injection estimate for any week of the refill-season months of May through September in the AGA's eight-year database," said the Energy Information Administration (EIA), confirming the AGA report.
Not only were injections low, there was actually a 12 Bcf withdrawal in the East. According to Barone, this was the first such withdrawal during the "traditional injection season since a 2 Bcf pull during the week ending October 31, 1997, which for all practical purposes was the beginning of the heating season."
While total gas inventories were still in healthy shape—at 249 Bcf, or 12%, above last year's total at this time and 134 Bcf above the five-year average—the numbers spooked the market.
While some questioned the veracity of the numbers, others attributed the decline in stock build to hot summer weather, higher demands from new peak power generation load, and Tropical Storm Barry. Nevertheless, the market responded.
"Although anticipating a low storage injection estimate, cash and futures markets alike were surprised by the historically low mid-summer net injection estimate. This resulted in temporary surges in cash and futures prices, which began to decline somewhat by the end of the week," said EIA.
"There is a contingency of people that move whenever a new number is flashed on the screen. This is a gross misrepresentation of the purpose of the report. The only way to stop this, however, would be to stop doing the report, which we are not going to do," said McGill.
A mystery revealed
AGA's widely anticipated subsequent numbers released on Wednesday, August 22, provided an answer to the anomalous injection figures of the previous week. The AGA made a revision to the data indicating that last week's figures were wrong. How did this happen?
"We don't speak to what happened. We don't throw our member companies into the fray. When we see something that looks a little funky, we pursue it. Sometimes it gets fixed before the posting, but if it doesn't and we've verified the number, we go with what we have," said McGill.
"Despite initial claims of accuracy, it came as no surprise that the AGA revised its market-startling 3 Bcf injection figure reported last week. According to the AGA, Consuming East figures were underestimated by 47 Bcf. As a result, last week's overall 3 Bcf injection figure was revised upward to 50 Bcf," said Barone in his weekly review of the gas market.
The latest storage report sent September gas futures spiraling down 10% to $2.84 per million Btu—the lowest level since April 2000
"After recording solid illusionary-driven gains last Wednesday, NYMEX futures have since fallen sharply post the AGA revision, mild temps and easing storm fears," Barone noted.
"The response to this is a measure of how out of control the trading element based on this report has become," said McGill, noting the hundreds of phone messages waiting for him after the numbers were released.
"It's nonsense how people are using this data. Errors are made in this type of reporting. EIA makes numerous revisions to their numbers each year," he said. "Obviously, we did not do this intentionally, but if it is a wakeup call to people to go back to our report and look at its purpose, that's OK."
Jim |
