The natural gas market’s ability to soar nearly $2/MMBtu in the span of a couple weeks despite near record high levels of working gas in storage is part of an annual pattern that is occurring, said energy consultant Stephen Smith of Natchez, MS-based Stephen Smith Energy Associates.

There has been a common perception in the market this winter and last winter that domestic and Canadian natural gas production will be insufficient, despite full storage, to handle a colder than normal winter, he said in an interview with NGI.

“Everyone understands that the market is, in a sense, operating without a safety net right now,” said Smith. “The safety net used to be that there was chronically spare productive capacity.”

The pattern between last year’s pricing and this year’s pricing is pretty similar, he said. “In each year, you’ve had a downward price trend all summer and fall. Just before Ivan hit, we hit $4.60; that was only six weeks ago. If you look at last year’s pattern, we were suffering all the way through Thanksgiving with a deteriorating gas price. That’s because people were nervous that storage was too high during the summer.”

In October of this year and in early December of last year, there was a greater-than 200 Bcf storage surplus compared to historical averages, but gas prices spiked anyway, Smith noted. “In each year, you added about $2/MMBtu in the space of about two to three weeks. We did it in the first week of December last year when there started to be some private weather forecasts calling for off-the-wall cold… This year we were sinking fast at $4.60 six weeks ago and then Ivan came along and removed [production] from the market.

“The funny thing that has happened this year is that the mild weather in the last five or six weeks has almost entirely offset Ivan,” said Smith. “He might as well not have happened. But it doesn’t make any difference. The market got nervous with the production gone and with the possibility of a cold fall and winter. It put nervousness in the price that we haven’t gotten away from yet.”

Of course, the additional factor this winter has been the high price of crude oil and alternative fuels. When prices spiked last December, gas was about $1.83/MMBtu more than New York residual fuel oil. However, gas prices were more than $2 over resid early last week.

Gas prices have been extremely volatile over the last two weeks. They moved up by nearly $1.40 two weeks ago from $6.630 at the opening bell on Monday Oct. 18 to $8.105 at the close on Friday Oct. 22 and then gyrated in 20-70 cent daily increments last week. The November contract went off the board on Wednesday at $7.626 down 78 cents from the previous day’s close. And then the December contract, the new near-month contract, ended the week down 26.9 cents at $8.725.

Meanwhile, the 26 Bcf storage injection reported by the Energy Information Administration last week for the week ending Oct. 22 was smaller than historical averages because of the above normal heating (9% above normal) and cooling (32% above normal) degree days during that week and shut in Gulf gas production due to damage from Hurricane Ivan.

But any way you look at it, storage levels are high. “It looks like we’ll get another 25-35 Bcf” in the next EIA storage report. “But if you try to add 35 Bcf, that would take us to 3,284 Bcf. That would be over the top,” said Smith.

The highest EIA storage number ever recorded was 3,274 Bcf, the October peak from EIA monthly data in 1990. The highest number in the 11 years of EIA weekly storage data was 3,254 Bcf set in 2001.

Despite the high level of gas in storage, however, the December futures contract still ended the week up 4.1 cents to $8.725.

The cash markets corrected pretty sharply last week, Smith noted. The Henry Hub ended on Friday at $6.43 on IntercontinentalExchange, down from $8.12 on Wednesday. Smith believes futures prices will come down from where they are currently, but cash prices may rise up to meet them.

“The old standard rule is that the winter is always magnified in advance,” said Smith. “I don’t know whether I am right on the timing. All you would need is for something to pop in the oil markets and we’re staying at $55/bbl or even hitting $65/bbl. But it’s possible that we could be at peak winter prices right here.

“There is a strong tendency to over-react on the front end of winter,” he said. “It’s not entirely irrational… We don’t know how cold the winter will be… I’m thinking oil is probably overdone here. I could look awfully foolish. But I also think gas also is partially overdone in sympathy. There are very few pleasant choices out there right now for consumers.”

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