With the brutally cold 2013-2014 winter firmly in the rearview mirror, the question that now looms is whether it will be possible to refill natural gas storage reservoirs in time for next winter, and at what price. Answering these questions would require an idea of how much gas should be in storage by the start of the heating season, according to NGI Markets analyst Nathan Harrison.
"Over the past five years the average total winter withdrawal has been roughly 2,150 Bcf so, to be able to support winter heating demand, there should be at least that much working gas in underground storage heading into the 2014-2015 heating season," Harrison said.
The winter of 2013 was one of the coldest to hit the U.S. Northeast in a long time, with massive polar vortexes bringing arctic temperatures out of Canada down to major U.S. population centers such as Boston and New York City. Indeed, this past winter was responsible for the highest prices on record in NGI’s Daily Gas Price Index with trading points such as Transco Zone 6 Non-NY hitting an all-time high of $140/MMBtu (see Daily GPI, Jan. 21). All the demand for heating gas deflated storage reserves like a nail in a tire, bringing total working gas in underground storage to a five-year low of 822 Bcf for the week of March 28.
The Energy Information Administration has published as a target for the week ending Oct. 31, 2014 a five-year average of 3,832 Bcf, which could serve as a reasonable base figure for the start of the winter, said Harrison. "If one were to use the five-year average as a starting figure, then the industry would need to inject an additional 2,452 Bcf of gas by November based on the 1,380 Bcf in storage as of May 23. Over the 2009 to 2013 period the average build for the remaining 22 weeks of summer was 1,451 Bcf, which, if added to the current total, would bring total working gas to 2,831 Bcf, about a trillion cubic feet shy of the previous five-year average. To reach a target of 3,832 Bcf within the next 22 weeks the market would need an average weekly injection of 111.5 Bcf, which is about 45% higher than the highest average weekly build in the last five years that occurred during the summer of 2011."
Analysts note that weather is probably going to be one of the biggest factors influencing the summer build with cooling demand likely causing a dip in the pace of injections. If the U.S. experiences a cooler-than-normal summer, that could certainly help by allowing more gas to flow into storage. Additionally, forecasts of a light winter could also have an impact bringing down expectations of heating demand and allowing the market to continue the storage recovery into next year.
The "base case" scenario shows storage levels for each week based on the average of injections or withdrawals for that week over the past five years. In this scenario storage levels do not significantly approach the five-year average during 2014, but instead come in 24% short of the average on October 31st at 2,926 Bcf. The "high case" scenario shows storage levels under the assumption that the highest historical injections and lowest withdrawals that occurred for each respective week over the past five year whereas the "low case" assumes the lowest injections and the highest withdrawals taking place.
"Even in the high case, storage levels do not meet up with the five-year average until mid-December," Harrison said. "Given that even in the rosiest of these possible scenarios storage levels do not reach the five-year average by end of summer, the market could well be cutting it close."
In the Natural Gas Supply Association's (NGSA) 2014 Summer Outlook for Natural Gas released Wednesday, the organization said gas production will set records this summer, but so much of it will be needed to bring storage to adequate levels before the 2014-2015 winter heating season that the net result will be soft upward pressure on prices compared with last summer. Those higher prices could drive more electric power demand to coal which would help make up for a shortfall in gas storage.
"When NGSA weighed all the different factors, the picture that emerged for this summer is one of slightly increased pressure on natural gas prices, chiefly because of the need to inject a greater than average amount of natural gas into storage in the wake of an extreme winter," said NGSA Chairman Greg Vesey. Henry Hub prices averaged $3.77/MMBtu last summer.