Weekly Commentary: Winter 2023-24

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Winter 2023-24 & The Natural Gas Sector: A Post Mortem

Sunday, March 31, 2024
I project that the natural gas storage withdrawal season came to an end late this week—or was put out of its misery, really. As anyone who has followed the natural gas sector over the past 4 months knows, it has been an exceptionally mild winter. This article will summarize just how mild the season was and its impact on natural gas storage heading into the upcoming Cooling Season.

First off, why was the winter so mild? A warmer-than-normal season was always in the cards. The primary driver of the warmth was El Nino, the global climate phenomenon fueled by rapid warming of the equatorial Pacific that began during the first part of 2023 and persisted into the Winter. During the winter, this pattern is characterized by dry conditions over Australia, Southeast Asia, and the South Pacific , above-average precipitation across the US West Coast and Southeast and, most relevant, broadly warmer-than-normal temperatures across the Upper Midwest, Great Lakes, and Northeast. Warmer-than-normal conditions were also likely supported by lingering impacts from the January 2022 eruption of the Hunga Tonga volcano in the South Pacific, the largest eruption since 1991’s Mount Pinatubo in the Philippines.

While volcanic activity can inject large amounts of sulfur dioxide into the upper atmosphere and drive global cooling, Hunga Tonga was a marine volcano and instead injected massive volumes of water vapor high into the atmosphere, which has a net warming impact. It can take 2-3 years for this to settle out and its warming influence I s most impactful during the winter. Finally, baseline climate change in any given winter increases the probability of warmer-than-normal conditions, something we have seen consistently over the past 20 years with only rare exceptions (2013-14, 2018-19, etc). It was likely the impact of all three of these factors that fueled the exceptionally warmer-than-normal conditions.

So how warm was it? As shown in the Figure to the right, all 48 states in the Continental US registered above-average temperatures during the November-February period that is defined as “Meteorological Winter.” The core of the warmth was concentrated across the Great Lakes into the Northeast where 8 states—North Dakota, Minnesota, Iowa, Wisconsin, Michigan, New York, Vermont, and New Hampshire—saw their single warmest winter on record. Another 28 states recorded a top 10 warmest winter. It is therefore unsurprising that the Lower 48 as a whole saw its single warmest winter on record.

The fact that the core of these above-average temperatures was concentrated over the Northern Tier which is the heart of natural gas heating demand during the winter was particularly bearish for Gas-Weighted Degree Days (GWDDs) and heating demand.

As shown in the Figure to the right, daily GWDDs were consistently below-average for the entire November-March withdrawal season. The exception was a quick shot of arctic cold during early-to-mid-January and then a more modest cooldown in mid-to-late March. However, this didn’t prevent GWDDs from finishing the period more than -400 GWDDs fewer than the 5-year average, all of which occurred after January 22.

At 3674.1 GWDDs, accumulated GWDDs for November 1-March 31 were by far the single fewest for the last 5 years, nearly 250 GWDDs fewer than 2019-20’s second-to-last place. Last year saw a neutral to slightly bearish 3999.4 GWDDs while 2018-19 registered the 5-year high at a robust 4345.0 GWDDs.

What was the impact of the warmth on natural gas inventories? Interestingly, despite the warmth, the short-lived January arctic blast still drive the third largest storage withdrawal on record, a very impressive -326 BCF withdrawal the week of January 13-19. However, the was the only withdrawal larger than -200 BCF the entire season. Overall, 14 out of the season’s 21 weeks registered bearish withdrawals, including a 7-week streak from early February to mid-March.

Natural gas inventories entered the withdrawal season in early November with a moderate +205 BCF surplus. As shown in the Figure to the right, this chopped around but held roughly steady into the first week of February before more than tripling to +678 BCF by mid-March, the highest since 2016. Ouch.

While it is hard to view the past 5 months through anything but an exceedingly bearish lens, the entirety of the spike in storage surplus can be attributed to the exceptionally mild temperatures. Supply/demand imbalances, courtesy of strong LNG exports (at least during the first half of the winter), exports to Mexico, and powerburn and softer production, have tightened up supply/demand imbalances such that even neutral temperatures would have driven bullish storage withdrawals. This bodes well heading into the Summer Cooling Season when powerburn demand becomes the primary driver of demand.

Moreover, the bearish El Nino that dominated the weather pattern this winter is fast transitioning to a La Nina pattern which features rapid cooling—rather than warming—of the East Pacific. Historically, this pattern has been associated with hotter-than-normal temperatures across the Lower 48 during the SUmmer, especially across the core demand region of Texas and adjacent states, as shown in the Figure to the right. I will discuss this outlook in depth in a future commentary but the combination of a tight supply/demand imbalance plus the potential consistently hotter-than-normal temperatures will likely lead to a steady contraction in the enormous storage surplus. The question on investors’ minds will be whether this contract can fully erode the surplus by next Fall and the next heating season, an effort that will undoubtedly require both bullish temperatures and supply/demand imbalances.