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By Robert Rapier on Feb 26, 2014 with 30 responses

Natural Gas Inventories are Headed Toward Zero

This winter has been one of the coldest on record. It’s been the coldest winter in at least 30 years, and I saw a report today that there is a chance that this will be Chicago’s coldest winter on record. Presently it is the 3rd coldest on record for Chicago, but another blast of cold air is just moving into the Midwest and East Coast.

Natural gas is a major energy source for heating homes, and prices have been spiking periodically in recent weeks as the weekly draws on natural gas inventories are higher than normal. Natural gas consumption in the US is highly seasonal, so producers use a system of underground pressurized storage that builds inventories until mid-fall, which are then depleted through the winter. Natural gas can be stored in depleted oil or gas reservoirs, in natural aquifers, or in salt caverns.

The US has nearly 9 trillion cubic feet (tcf) of natural gas storage capacity, but only a fraction of that has ever been used. According to the Energy Information Administration (EIA), the actual amount in storage has never exceeded 4 tcf. Inventories will usually build to between 3 and 4 tcf by ~ November 1st each year, before being pulled down to under 2 tcf by the end of winter. So a typical winter season will see just over 2 tcf pulled out of storage — an amount equivalent to about 10 percent of annual US natural gas production.

In the case of a mild winter as in 2012, inventories won’t be pulled down as much before they begin to rebuild. In fact, the winter of 2011-2012 failed to pull gas inventories below 2 tcf for the first time in over 20 years. It wasn’t a coincidence that this corresponded to natural gas prices that went below $2 per million Btu (MMBtu) the following month, and spent a full year below $4 per million Btu (MMBtu).

Presently, the exact opposite is happening. This season’s withdrawal marks the fastest inventory depletion on record during the winter months. We have already withdrawn 2.4 tcf — more than the average for most winters — and we are likely 4-6 weeks away from the bottom. If withdrawals continue at the current pace, the inventory level would reach zero the week of March 28th (see the figure below), which is usually around the time inventories start to recover. This may lead to more spiking prices in the weeks ahead, but more importantly it will probably support higher than normal natural gas prices for the rest of the year.

Gas in Underground Storage
Gas in underground storage is on a trajectory to hit the lowest inventory on record

Regardless of what happens over the next 6 weeks, natural gas inventories will probably bottom out at the lowest level on record. The current lowest inventory level on record took place on April 11, 2003 at 642 billion cubic feet (bcf).

Natural gas in underground storage hasn’t dropped below 1 tcf since 2003, but the latest EIA report showed inventories on February 14th at 1.4 tcf and falling at a weekly rate of 245 bcf per week (average rate of decline over the past month). At that rate, we will go below 1 tcf of gas in underground storage this week, but the EIA won’t report that number until late next week.

Obviously you could have extrapolated any of those previous years to zero, but the point is that inventories generally start to rebuild after March 28th. Extrapolating previous years would have interested with zero around mid to late April, after injection season has resumed. The following graphic makes it a bit more obvious that this year’s decline is historically abnormal:

Natural Gas in Storage

The media hasn’t spent much time covering this issue, but I expect it will garner some attention if we drop below 1 tcf next week since it hasn’t happened in over a decade. This would put the US about one more cold snap from sending natural gas prices to the moon.

Natural gas prices have been falling in recent days, but I think that sell-off is premature. I predict that we will drop below the previous all-time low of 642 bcf from 2003. If the weather warms up soon we may be able to avoid it, but it looks increasingly likely to me.

Link to Original Article: Natural Gas Inventories are Headed Toward Zero

By Robert Rapier. You can find me on TwitterLinkedIn, or Facebook.

  1. By LiberalArtsTrader on February 26, 2014 at 9:44 pm

    Are producers as a whole incapable of building storage above 4 tcf or is doing so a recipe for a price collapse they would all seek to avoid?

    • By Robert Wilson on February 28, 2014 at 6:13 pm

      This was discussed at Peak Oil Barrel a few days back. There was concern about next year especially if there is another cold winter. There seemed to be doubt about the likelihood of a sufficient summer build. A hot summer or a business boom might also be a problem. Then there could be regional problems.On the other hand in response to a question about the potential significance Grealy, a shale gas booster tweeted:

      Nick Grealy ‏@ShaleGasExpert Feb 20

      “Not as much as it used to, due huge overhang of gas in ground unconnected to midstream”

      –In addition to the working gas there is base or cushion gas. I assume that some might be available in an emergency but it is needed to maintain proper pressure and flow. Stay tuned.

      • By LiberalArtsTrader on March 1, 2014 at 11:54 am

        I would think any producer that scaled down after 2012 could lock in prices reflected in today’s futures markets and ramp up production. With capacity at 9 tcf, it’s ludicrous to risk running out of NatGas during heating season.

        • By Robert Rapier on March 1, 2014 at 12:18 pm

          Storage capacity is that high, but not production capacity. Plus, there has been a huge shift in natural gas rigs from gas production into oil production. Would take some time to switch them back. So I think we will be working at a deficit throughout injection season.

  2. By JohnnyCJohnny on February 26, 2014 at 10:23 pm

    The thing I don’t understand about your analysis is the statement that “If withdrawals continue at the current pace, the inventory level would reach zero the week of March 28th”. What are the chances of that? Tomorrow’s report will be around 100 Bcf withdrawn. After that a couple of heavier weeks, not likely 20+, and by then it will be spring. Warmer weather will keep nat gas inventories from going to zero.

    • By Robert Rapier on February 27, 2014 at 1:15 am

      Historically inventories haven’t turned up yet as of March 28th. We won’t go to zero; prices will make sure of that. But one more really cold snap and it will send inventories near zero. This has been the fastest draw down over a winter in history, and with a month still to go in the season the record low will be threatened.

    • By Rick Larson on March 5, 2014 at 4:54 am

      Tsk Tsk. The fact is you never considered the possibility. But I understand, critical thought is are so very rare these days. Hey, you can always alleviate your anxiety by joining the Palin crowd screaming “Drill baby drill!

  3. By JohnnyCJohnny • on February 26, 2014 at 10:26 pm

    Not likely 200+ Bcf withdrawals is what I meant to say. We may reach injection season within a month.

  4. By Rock on February 27, 2014 at 12:49 pm

    Good info. Thanks.

  5. By Ben on February 27, 2014 at 1:51 pm

    Given the 95 Bcf pull for the reported week today and production climbing back up and even ramping new wells, most likely number is 700 Bcf, which will easily be brought up through a strong injection summer.

    • By Robert Rapier on February 27, 2014 at 3:30 pm

      The number today was less than I expected, but the cold weather that hit this week will probably result in a larger draw next week. But the point isn’t that it won’t be brought up, it is that since inventories are at such low levels, this will be supportive of higher prices into the fall and producers will need to have strong production. Hence, this year will probably be profitable for natural gas producers.

  6. By notalemming on February 28, 2014 at 2:52 pm

    No report out yet. I wonder does the storage include the volume to maintain the pressure in the gas lines up to keep the gas moving?

    • By Robert Rapier on February 28, 2014 at 9:55 pm

      Pretty sure that’s minimum working volume, so yes, I think it does. In any case, it’s been down as low as 642 bcf before, and we will threaten that low. Biggest takeaway though is that it’s going to take a while to build inventories back up, and gas prices are going to be higher than normal.

      The report did come out. The draw was 95 bcf, but with the cold weather showing up again this week you can expect next week’s draw to be back up. We are probably still a minimum of 4 weeks from injection season.

  7. By Tony Smith on March 4, 2014 at 3:19 pm

    I’ve looked at the prices of natural gas over recent years and if anything they seem to go up in the Summer when there’s more stored gas around and down in the Winter when there’s less…..shouldn’t the reverse be the case ?
    Tony Smith

    • By Robert Rapier on March 4, 2014 at 4:04 pm

      What I have seen is that when inventories are pulled way down, it usually coincides with higher gas prices, and vice versa. Two very good cases in point where inventories were either abnormally high or low were 2003 and 2012.

      • By Tony Smith on March 4, 2014 at 5:44 pm

        Thanks Robert…..I was hoping that I would see a correlation with gas prices ie I’d be able to draw the opposite graph with prices low in Summer and high in Winter….but in reality I suppose things must take a time to work out ?

        • By Robert Rapier on March 4, 2014 at 6:08 pm

          If you look at the futures curves, they are exactly like that.

          • By Tony Smith on March 5, 2014 at 4:07 am

            Thanks Robert but I’m not very aware of futures…..have you done anything on them …or can you show ?

  8. By Alan Drake on March 5, 2014 at 6:07 pm

    Natural gas used for electrical generation is going to significantly alter the historical flows and “rules of thumb”. For example, there will likely be draws from storage if this year is an abnormally hot summer,

    From memory, 56,000 MW of coal fired generation will be retired by 12/31/2015.

    Some of this is no longer needed due to greater efficiency (light bulbs, appliances, HVAC and more). Some will be replaced by renewables but the vast majority will be replaced by natural gas generation.

    Some NG generation will be highly efficient (up to 60+%) combined cycle generation. Some from re-powered old coal plants (31% to 34% efficient). In a hot summer, all units will be run.

    So I expect to soon (if not this year, then by 2016) see two seasonal draws on natural gas reserves, in winter and summer.

    Now add a hurricane shutting down production in the Gulf of Mexico …

    • By Ken Meyercord on March 12, 2014 at 12:41 pm

      Be aware that last year the use of coal to generate electricity went up by 6% while the use of natural gas went down by 12%.

      • By Alan Drake on March 12, 2014 at 1:13 pm

        The vast majority of coal plant retirements are in the near future, by 12/31/2015.

        The collapse of US coal prices has lead to more coal burning – plus plants to be closed will want to burn off their on-site inventory.

        French electricity exports took a hit as well. German coal plants, burning cheap coal imported from the USA, were price competitive with French nukes.

        I stand by my prediction for the future, even though I expect coal to generally be cheaper#

        # with an old or converted NG plant (say 34% efficient) $3 NG was competitive with coal in many markets with 34% efficient coal (coal costs more to burn, ash disposal, grinding & moving around on site, operating pollution controls
        - it is more than BTUs).

        With 50+% to 60.75% efficient combined cycle generation, even higher priced NG is competive with coal. Unfortunately, we do not yet have enough modern combined cycle plants in the 60% efficiency range. I would like to see an ITC for them.

  9. By takchess on March 10, 2014 at 8:44 pm

    My neighbor here in NH has been sent notification that next years Natural Gas prices to his home will be double this years.

  10. By Tom G. on March 11, 2014 at 9:05 pm

    There must be a few good reasons to express why we are stuck at 22 comments and in a seemingly endless holding pattern.

    1. Robert is traveling,

    2. He has caught a cold or has the flu,
    3. A masterpiece is coming which will tickle everyone’s fancy, or;
    4. He is finally taking some time to enjoy his family.

    My hope is that it is either number 3 or number 4. I guess in retrospect number 4. is probably the best choice.

    • By Robert Rapier on March 11, 2014 at 10:55 pm

      Actually you hit on 3 of 4. I was traveling out of the country, and then back to Hawaii to visit my family last week. I went on a camp out with my son’s 5th grade class, and came back to Arizona with a cold. When I got back last Friday, I had 5 writing deadlines to finish by this Wednesday. I have 4 of the 5 done. When I finish the 5th, then I will have time to put up something new. Was thinking of waiting until the new natural gas storage report on Thursday and then commenting on that.

      But thanks for noticing I had vanished. This is the longest I have gone without putting out something new in a long time. Internet problems at my hotel haven’t helped matters much. I have tried to post this comment 3 times only to find I was disconnected when it tried to post. It’s been up and down like that for several days.

      • By Tom G. on March 12, 2014 at 12:45 pm

        Living in Arizona means we have the technology that can help your cold but well technology really isn’t the right term. Just come and visit in July or August. It will be between 10% relative humidity and 115 F in the shade. Cold germs die under those conditions, LOL

        Get well soon Robert and try packing a wireless hotspot next time. Connect @ 2/3G or LTE. Works for me if you can get cell service.

  11. By Ken Meyercord on March 12, 2014 at 12:27 pm

    Couple of questions. How much of current consumption comes from storage vs. from current production? Is gas storage similiar to the Strategic Petroleum Reserve? For instance, who owns the gas in storage? Is it meant for emergencies but actually being used to dampen price swings? A little background would help for us neophytes.

    • By Robert Rapier on March 13, 2014 at 12:31 am

      Hi Ken,

      What’s drawn down in winter is equal to about 10% of annual consumption. It isn’t like the SPR, in that it is stored there during one season for use in a higher demand season. The gas can be owned by either the gas producer or the customer.

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