Tuesday, April 26, 2016

Natural Gas: The Impact Of Spring Storage Surplus On Summer Prices

Soon-to-be front month June's $2.182 down 0.005.
From RBN Energy, April 21:
The U.S. natural gas market ended the winter withdrawal season with inventories carrying a record high overhang and an enormous surplus versus previous years. Since then, the historic surplus has begun to contract, and the CME/NYMEX Henry Hub futures contract has responded, rallying 11.2 cents since April 1st to settle at $2.068/MMBtu Thursday. Now, well into the third week of injection season, the big questions are whether the recent bullishness can be sustained and what it will take to relieve the surplus in storage. In today’s blog, we assess how the existing surplus will impact summer storage activity and prices.

This is Part 2 in our “Carry That Weight” supply/demand update series. In Part 1, we recapped the winter withdrawal season, in which mild weather suppressed demand even as production set new record highs, resulting in oversupply and some of the lowest daily futures settlement prices in 17 years. U.S. natural gas storage inventories ended the winter heating season at a record high of 2,480 Bcf as of April 1, 2016, which translated to a 1,004-Bcf surplus to the corresponding week in 2015. Daily futures prices this winter averaged just $2.05, $1.175 (36%) lower than last winter.

As we noted in Part 1, storage inventory levels at the end of the winter season typically set the tone for storage activity and prices through the injection season, which runs from April 1 through October 31.  Natural gas storage has a seasonal pattern as regular as clockwork, driven largely by fluctuations in weather. In the winter, daily gas demand is historically higher than daily production, resulting in withdrawals from storage – spurred by contractual obligations of storage capacity holders and higher winter prices that entice gas out of storage to help meet heating demand. 

Thus, at the end of winter, inventories are generally at their lowest point for the year. On the other hand, Injection season begins as weather warms up to the point where demand becomes lower than daily production; the surplus is put into storage for use when it is needed again -- the next winter. Thus, inventory levels usually peak some time in November, just before winter demand kicks in again. That peak typically falls well short of the theoretical total U.S. working gas storage capacity, which (as of capacity data through November 2015) the EIA estimates at 4,343 Bcf. The highest observed level historically is the 4,009 Bcf we saw last November (2015).

The big deal this year is that the lowest point (2,468 Bcf, seen in the week ended March 25, 2016) and the subsequent winter-ending volume in storage as of April 1 both were exceptionally high – as high as levels typically seen in late June or early July, at least 9 weeks into injection season. As we noted previously in our March storage update blog Nat Gas Storage Limits, the combination of the high inventory level at the beginning of injection season and the looming storage capacity ceiling inherently means there is physically less storage space left available for the market to inject this summer. We also know from that analysis that because of the capacity limitations, the market theoretically cannot withstand much more than a 300-Bcf surplus on top of last year’s 4,009-Bcf peak inventory.  One catch however, is that ‘theoretical’ caveat.  No one really knows what the real maximum inventory level is.  It could be higher than the EIA’s number of 4,343 Bcf, or lower.  But if we assume that level really is the maximum, then injections must average much lower this season than they did last year or historically....MORE