The National Oceanic and Atmospheric Administration (NOAA) reports cooling degree day (CDD) data for every seven-day period by state. From that data, they construct a populated-weighted national total.
CDDs are the difference between the daily temperature mean (high temperature plus low temperature divided by two) and 65°F. If the temperature mean is above 65°F, we subtract 65 from the mean.
Example: The high temperature for a particular day was 90°F and the low temperature was 66°F. The temperature mean for that day was:
(90°F + 66°F)/2 = 78°F
Because the result is above 65°F:
78°F - 65°F = 13 cooling degree days.
Cooling degree days affects natural gas use because it is a feedstock to electric utilities. Electricity powers air conditioners.
Over time, natural gas has been replacing coal as a feedstock to utilities. It follows that to understand how summer temperatures affect natural gas consumption; it is important to know where utilities are burning natural gas and how much.
I take NOAA’s state-by-state CDD data and weight each state by its relative natural gas use at electric utilities. In that way, I get a more accurate picture of CDDs to gauge natural gas use.
To prepare quantitative projections of future consumption, the first step is having a model that relates degree days to demand. In my model, I use three factors: heating degree days, cooling degree days, and GDP.
With just these three factors, I have a 97% multiple regression fit since 2012. This means these factors, each of which is highly statistically significant (as indicated by the T-statistics), explains 97% of the monthly variation in demand (see graph below).
The table below shows the predicted v. actual storage levels for each week this summer. It also shows the year-over-year change. Based on actual CDDs for last week and predicted CDDs for this week, the storage glut will have been reduced from 27% in the week ending June 3rd to just 7% for the week ending August 26th. This is why natural gas futures prices have found support this summer.
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INO.com Contributor - Energies
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.