Natural gas demand follows "degree days" data

Current warm winter creates a buying opportunity if next winter turns colder

Energy investors often forget that energy use has indicators. Seventy percent of energy consumption is correlated with “degree days” - a degree day is the the number of degrees either side of 15 deg. C on a given day adjusted for population in a given area. There are cooling degree days (when temperatures are above 15 deg. C calling for air conditioning) and heating degree days (when they are below and heating is required). These data are kept by the U.S. Energy Information Administration (EIA) and the National Oceanic and Atmospheric Administration (NOAA) and used by meteorlogists and others for modelling. For example, cooling degree days in 2022 were primarily in the lower U.S. States.

The two agencies act independently but arrive at somewhat similar estimates which differ largely owing to different population data (one current, one from the most recent census). Population weightings are important given the wide range of population densities across U.S. cities and rural areas.

In Europe, degree days fell from 3,000 in 2021 to 2,600 in 2023 (the lowest on record) which saved Europe from a calamitous shortage of natural gas and took the edge of natural gas prices which had reached the equivalent of US$500 per BOE of oil. 2024 is starting out warmly in the late stages of El Nino but the question gas investors in both Europe and North America might ask is whether there will be a “mean reversion” which implies a sharp rise in degree days in the late fall of 2024 and following winter.

Source: Thunder Said

A cold winter can pull as much as 3 bcf/day additional demand for natural gas in Europe and a similar amount in North America. Since Europe has become dependent on LNG exports from United States such a sharp increase in demand will largely affect the supply-demand balance in North America.

Whether such an event takes place this winter, or some later winter, it is more likely than not to occur in my opinion. That will result in firm prices for natural gas in North America as well as in Europe if it does occur. Who benefits?

During the cold cycles, all natural gas producers share somewhat similar outcomes.

The differences arise primarly as a reflection of the mix of commodities with those with higher liquids content tending to produce better results when oil and condensate prices are firm and dry gas producers displaying better results when the reverse is true. I chose the 30-month period from March 31, 2021 to September 30, 2023 to ensure the periods conformed to the seasons rather than the Gregorian calendar and started as the COVID-19 disruption was ending.

The current fall and winter are anomalous owing to the El Nino cycle and we are mid-winter and I wanted the comparisons to include full seasons.

I see a handful of companies that would benefit materially from a cold winter late this year - Tourmaline Oil (TOU.TO), ARC Resources (ARX.TO), Peyto Exploration (PEY.TO), Canadian Natural Resources (CNQ.TO) and of course large American natural gas producers like Chesapeake (CHK) and EQT (EQT). Birchcliff (BIR.TO) has very high leverage to higher natural gas prices and is currently in the penalty box after cutting its dividend and hunkering down to endure soft prices this summer.