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By Robert Rapier on Mar 13, 2014 with 9 responses

Gas Inventories Reach 11-Year Low

Natural Gas Update

Two weeks ago I wrote about the abnormal situation with natural gas inventories in Natural Gas Inventories are Headed Toward Zero. I got a number of questions and comments about that essay, and since then we now have another two weeks of inventory data, let’s update the picture.

First, I want to deal with some misconceptions that a few people had. I don’t think we are going to run completely out of natural gas in storage. My point was that this winter marked the sharpest decline trajectory and we have made the largest ever withdrawals from storage in history, and barring a sudden warm spell we are going to go into injection season with very low natural gas inventories.

This has implications. Why? Because historically a significant deviation of inventories from normal will have a lingering impact on natural gas prices.

To address the second misconception, that doesn’t mean I believe natural gas is going to be $10/MMBtu for the rest of the year. It could spike to that level briefly, and has already spiked above $8/MMBtu twice (February 5th and 10th), but this is not my thesis. Natural gas prices have pulled back somewhat in recent days, leading one person to essentially say to me on Twitter “See, you were wrong about natural gas prices. They are pulling back and will probably settle in between $4 and $5 for the year.”

My Point Exactly

But you see, that’s exactly my point. Nobody was talking about $5 natural gas six months ago. Previously I highlighted some reasons I believe that gas is going to trade up into the $5-$6 range over the next 3 to 5 years, and I did predict higher natural gas prices for this year. But those predictions are based on long-term drivers. One thing I said when I predicted higher natural gas prices for this year was that short-term weather events can override these long-term drivers. Even though I foresee $6 gas in 5 years, that won’t be a straight trajectory. A very warm winter could have dropped gas prices below $4 for the rest of the year, and I would have been wrong in my prediction (even though I think I am right on the long-term drivers).

Instead, we have seen an extremely cold winter, so the long-term AND short-term factors are both lined up in the direction of higher natural gas prices. Thus, instead of seeing gas between $3 and $4 this year, we are going to see natural gas over $4, and I am 99 percent sure now my prediction for the year will end up correct.

The Latest Inventory Report

So where do things stand? Today the Energy Information Administration (EIA) released its latest Weekly Natural Gas Storage Report covering inventories through the week ending 03/07/14. Previously I had written that we were on track to drop below 1 trillion cubic feet (tcf) of storage at the end of February, but the week I wrote that it warmed up a bit and we had a light draw from storage. The most recent week the draw was relatively large, and that left the country just a hair over 1 tcf (1.001 tcf to be exact) — and 49 percent below the level at this time last year.

Gas in Storage Average

Right now, the draw down over the winter stands at 2.8 tcf — the largest withdrawal ever recorded. During the lowest inventory level on record — the 2002-2003 winter — the draw down was 2.5 tcf. In 2002 inventories started out at 3.2 tcf, while our present winter inventories started out at 3.8 tcf. Had we started the present winter out at the same point as that winter 10 years ago, we would be literally out of gas in storage this week or next week.

Projecting the Future

As it stands, inventories will still be uncomfortably low for the rest of the year. Yes, we will begin to strongly build inventories within the next month, as we do every year. But my point has been that we do so from such a low starting point that we will probably be below the average for the rest of the year. The EIA has just published a new Short-Term Energy Outlook that highlights exactly what I have been saying:

EIA Natural Gas Projections

The EIA projections are that we will have a negative deviation from the average not only going into the winter of 2014-2015, but all the way until the winter of 2015-2016! The inventory situation could normalize if next winter is abnormally warm, but if we have a normal winter inventories will still be lower than average all winter, and if we have a winter resembling this one we are going to be looking at natural gas prices north of $10/MMBtu.

Conclusions

In 2013 the average closing price for Henry Hub natural gas was $3.73/MMBtu. I predicted the average would be higher this year, and as a result of the very cold winter I think it’s a pretty sure thing at this point. I would guess we will end up averaging something like $4.50/MMBtu for the year, which is money in the bank for many natural gas producers. In fact, the latest monthly Short-Term Energy Outlook (STEO) released Tuesday by the EIA projected the average for 2014 at $4.44/MMBtu, which is 6 percent higher than their forecast from February’s STEO.

I don’t think the market has priced in the likelihood that the natural gas inventory picture is going to be tight for quite some time. Some natural gas producers have even sold off recently, even though I think they will have stronger financial performance than a year ago (even if their production is flat). It could be a good time to go bargain hunting.

Link to Original Article: Gas Inventories Reach 11-Year Low

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

  1. By Biophiliac on March 14, 2014 at 4:09 am

    I think the EIA forecast is too optimistic. For one, the storage levels are likely to bottom out ~200bcf lower than shown in their graph. Also, the slope they have for the inventory growth this spring is way higher than what it has been in the past. Low storage levels in Canada, which also has very low inventory due to a cold winter, may also play a role by reducing imports.

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  2. By shecky vegas on March 14, 2014 at 12:14 pm

    Better get used to those gas spikes in winter. “Polar Vortex” is going to become common language in the coming years.

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  3. By newman1979 on March 15, 2014 at 12:11 pm

    The weather forecast is for a colder spring in the population centers. The draw as of Mar. 14 and 21 will probably be more than expected, maybe 200 Bcf. A few weeks of some draw and some build will put storage under 800 Bcf for a little longer. A hot summer will keep the inventory lower than anticipated. 5-7$ with a 8$ spike is possible if the weather forecasts prove out. Hoarding is possible also, as is panic buying.

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  4. By DrJimbojinx on March 16, 2014 at 11:45 pm

    On Fri Science published a report involving a cheaper way to convert alkanes to transportation fluids. Should this hold true we have another growing demand on NG utilization and its resultant increase in value and cost.

    Lab results raises question: Do we need oil if we have natural gas?
    “Researchers say they have uncovered a way to convert key compounds in
    natural gas to alcohols for use in industry and transportation far more
    cheaply than current approaches, raising the possibility that gas could
    unseat petroleum as the primary source for fuel or chemicals used to
    produce materials such as plastics.

    “This is a scientific breakthrough,” says Daniel Resasco, a University of Oklahoma
    chemical engineering professor, who was not a member of the research
    team. However, he, too, cautions that much more work needs to be done to
    see if the approach the team used is commercially viable.

    If it is viable, it could have a profound effect on boosting the value of natural gas, which the United States
    is producing in prodigious amounts since the advent of hydraulic
    fracturing, which uses high-pressure fluids to shatter gas-bearing rock
    formations and release gas that otherwise might be
    unrecoverable…….”.

    http://www.csmonitor.com/Environment/2014/0314/Lab-results-raise-question-Do-we-need-oil-if-we-have-natural-gas
    Read more at http://www.stockhouse.com/companies/bullboard/t.pey/peyto-exploration-development-corp#TxJDvTEeQTyL8Lik.99

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    • By Forrest on March 17, 2014 at 8:23 am

      Interesting, one chemist commented he had been working on low temperature conversion for 25 yrs. They have one piece of puzzle and need to complete the catalyst cycle for second piece. Biofuel, as well, is having success going the other direction per catalyst conversion of ethanol to more valuable chemical production.
      I often come back to thinking of utilizing energy per best value, meaning it’s not only the BTU or KWH value of energy, but more of a pyramid with biomass on bottom and electricity at peak. Lower value on the base that is best used for easy task of heating as it can compete efficiently upon that application Conversely, it’s a waste to utilize expensive to produce, store, and complex to distribute electricity for that task. The best value of coal since we have large stores of the energy and considering the high cost and technology requirements to burn the fuel environmentally safe, is for large stationary power plants base load fuel. Same with nuclear energy. Best to accomplish base load power generation with low value fuel as the process of electricity generation is quite wasteful as most plants are not combined cycle nor utilize heat for other uses. Only solar and wind convert efficiency and do so with little pollution, but have other “issues” that will limit their utilization. Transportation makes high demands on energy and present day per economics and convenience limited to the fuel market per energy density, infrastructure, and refueling requirements. Electricity is to valuable and expensive commodity to put to this task for other than use upon extremely sensitive to pollution metro areas that require light duty transportation for short distances. Natural gas is to valuable to waste on electricity production upon stationary power plants. Best to utilize the fuel per the convince, flexibility, and unique process requirements such as critical temperature control and automation. So, natural gas is a good fuel to quickly fill power production gaps, but to valuable a fuel to replace coal or nuclear upon large demand of stationary power plant. Also, NG is a great fuel for backing up bio-fuel for heating needs per ability for long term unattended operation. NG best use may be per the CHP energy production process if heat is a valuable component. Electricity, always a valuable energy product and usually produced with a great deal of waste heat. We should be producing electricity as a by product where ever heat is needed. Best part of NG CHP process is that it fits in nicely up close to where electricity is needed, naturally a back up power source, saves money, very efficient energy conversion, extremely low net energy polluter, and can be exploited easily to balance grid production vs consumption gaps as heat load is very forgiving.

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  5. By Robert Wilson on March 17, 2014 at 1:28 pm

    During recent years best storage recovery less that 2700 BCF http://americanoilman.homestead.com/GasStorageGraph.html

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  6. By Alan Drake on March 18, 2014 at 10:04 am

    Two other factors to consider.

    One is the hurricane season. The amount of NG production shut in varies widely, year to year. On the high end, the volumes lost are significant.

    The other is that we are on the leading edge of coal plants shutting down. Utilities can do fuel arbitrage between coal & NG as long as they have enough generation capacity of either coal or NG to meet demand. Soon, for many utilities, they will not have enough coal generation to meet demand even in moderate weather. They will have to burn NG regardless of price. In extreme weather, all generation is run.

    “Soon” is likely to be the summer of 2016 for many utilities. None-the-less, structural demand is changing for NG. A warm later spring and summer may defer filling NG storage due to air conditioning demand. Add hurricanes and NG has significant upside potential.

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  7. By Aneeda Chen on November 14, 2014 at 1:15 am

    I believe that the recent decision to export LNG has had the largest effect on our inventories and reserves.

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    • By Robert Rapier on November 14, 2014 at 8:23 am

      No, because nothing is being exported yet. The first real exports will come online at the end of next year or early 2016.

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