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Consultant: Storage May Not Reach Record High, But Winter Prices May Have Peaked
While it’s possible that this week’s gas storage injection could end up being only 16 or 17 Bcf and that storage will fall short of a record level this year, it’s also quite possible that winter natural gas prices may already have reached their peak, according to energy consultant Stephen Smith of Natchez, MS-based Stephen Smith Energy Associates.
Smith’s weekly supply/demand model projects a storage inventory increase of 17 Bcf for the week ending Oct. 22. The amount of gas available for injection last week was limited by two major factors: above normal heating (9% above normal) and cooling (32% above normal) degree days and shut in Gulf gas production due to damage from Hurricane Ivan.
Together the impacts from shut ins and abnormal weather cut about 28 Bcf out of the storage injection, according to Smith. As a result, storage is projected to increase from 3,223 Bcf to 3,240 Bcf with only one week left in the traditional storage injection season. Of course, the weather could remain mild and injections could continue into November.
Any way you look at it, storage levels are high. Despite the storage surplus, however, gas prices spiked last week to more than $9.50/MMBtu for January delivery. Current Henry Hub spot prices are near $7.75/MMBtu.
Smith believes the ability in the market to produce sharp price increases in the face of a growing storage surplus is part of an annual pattern that is occurring. 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.”
But 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, yet gas prices spiked, 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.”
That nervousness in the marketplace is related to the perception 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. The storage withdrawals last winter, particularly during the peak cold in January, prove that perception was correct, said Smith. The withdrawals were much larger than historically would have been the case given the level of heating demand, he said.
The added factor this winter is 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, currently gas prices are more than $2 over resid.
“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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