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By Robert Rapier on Dec 4, 2014 with 13 responses

Injection Season is Over

Back in February, I wrote an article called Natural Gas Inventories are Headed Toward Zero. The purpose of the article was to call attention to the fact that natural gas inventories were experiencing the fastest decline in U.S. history, and were approaching dangerously low levels heading into the end of winter. In August I did an update to that article called Why Natural Gas Prices Collapsed. Because natural gas prices rose following that article, and since injection season is now over (see below), let’s once more revisit what happened with natural gas this year.

In prior articles, I explained how the U.S. natural gas inventory system works. The U.S. has 9 trillion cubic feet (tcf) of natural gas storage capacity, but according to the Energy Information Administration (EIA), the actual amount in storage has never exceeded 4 tcf. During the summer season when demand is lower, natural gas inventories will usually build to between 3 and 4 tcf. This build usually starts around mid-April, and then about mid-November as cold weather begins to ratchet up natural gas demand, the withdrawal season begins.

This year injections began during the first week of April. At that time, natural gas inventories were at their lowest level in more than a decade, so that any supply/demand imbalances during injection season could cause natural gas prices to spike. In fact, gas prices did spike several times toward the end of what was the coldest winter in many years. My thesis was that low inventories would affect the natural gas markets in the following ways. Year-over-year natural gas prices were likely to be higher than the previous year because supplies were lower. Natural gas producers would need to produce at high rates to replenish the inventories, and since I believed they would be getting better prices for the natural gas, profits would be up for most producers. This, naturally, would cause the share prices of natural gas producers to rise.

But markets can behave irrationally. You can be right on all the details, and still have the market go against you. This is one reason I don’t short stocks. I have seen the market cap of a $500 million company that I thought was worth less than $100 million rise above $1 billion before beginning its decline. So your investment thesis may be sound, but you could still lose money.

Going long is different in that I can exercise more patience if I am not investing on margin. I believe that a number of drivers (e.g., the phase-out of coal, the beginning of LNG exports) will push natural gas prices higher over the long term. But the short-term natural gas markets are far more weather-driven. Over time those weather events will roughly balance out, so if I am correct on the long-term thesis I can ride out the short-term moves.

Last winter’s colder-than-normal weather was one of those short-term weather events that lined up with my long-term thesis on natural gas. Natural gas prices would surely rise. But short-term weather events can go both directions. A mild summer moderates natural gas demand from utilities because of reduced use of air conditioning. On the other hand, a hot or even a normal summer, combined with the severely depleted inventories, had the potential to cause much higher natural gas prices.

How often do we have a mild summer? Not often in recent years. So it was a pretty good bet that there would be upward pressure on natural gas prices through the summer.

But the U.S. did have a mild summer this year. In fact, despite recent reports that this was the hottest year on record for the planet overall, the U.S. was one of the places experiencing cooler-than-normal weather:


After a series of warmer than normal summers, much of the eastern half of the U.S. (and Canada) had cooler than normal temperatures. As shown in the graph below, natural gas demand from electric utilities was lower this summer than in the previous two summers (although only modestly below last year’s demand).

Electric Demand

Meanwhile, natural gas producers did produce at the highest levels in history. Last year’s record production was surpassed.

Dry Gas

The net result was that natural gas inventories were refilled much faster than normal this year:

Gas in Storage

The November 14th edition of the weekly Natural Gas Storage Report showed the first decline of natural gas inventories since spring. This marked the beginning of withdrawal season. We started this year’s withdrawal season only 6.4% below the five-year average for this time of year, and only 5.3% below last year’s level. If we have a winter like last winter, we are going into it in slightly worse shape than a year ago. Because of the mild summer, we are in much better shape than we might have been. But this first cold spell came earlier than normal, so only 2 weeks into injection season we are back to 10% below the five-year average.

So how did all of this impact my short-term natural gas thesis? Natural gas prices were in fact consistently higher than they were a year ago (also one of my 2014 predictions):

Gas Prices

Natural gas producers, as shown in the previous graphic, produced at their highest levels ever. So we had higher prices and higher production. This did in fact translate into higher year-over-year profits for most natural gas producers.

But the mild summer and the speed at which inventories were refilled kept the share prices of most of these producers in check. Some major natural gas producers that are also significant oil producers, like Devon Energy (NYSE: DVN) and ConocoPhillips (NYSE: COP), had very impressive returns up until the oil price correction that started in July (and both have held up well during the major sell-off). Others, like the Cabot Oil and Gas (NYSE: COG), saw their share price decline even though natural production and profits surged.


Ultimately, the long-term thesis on natural gas remains the same: I am bullish. But I am more neutral now on the short-term, because inventories are near normal and I can’t predict the weather. Even so, given the same conditions that we saw in the spring, I would make the same short-term bet all over again. Most of the time it should work out better than it did, but this year a mild summer tempered returns.

Link to Original Article: Injection Season is Over

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

  1. By Russ Finley on December 4, 2014 at 10:11 pm

    Natural gas is by far, our most versatile energy source. I’m listening to the hum of my forced air gas furnace as I type. Many of our cabs, and all of our garbage and recycling trucks run on it. It can also do baseload and peaking power for electricity and those are just the tip of an iceberg when you consider its other industrial uses.

    I’m guessing that in the long run, demand may start to outstrip supply faster than in the past because we are using more of it for more purposes. Peak gas may arrive much faster than anticipated.

  2. By Forrest on December 5, 2014 at 7:36 am

    I understand the current low cost of crude already impacting shale drilling. That development is on hold and some companies not able to meet payments. Will this decrease NG supplies? Also, citizens need to look at the market of supply vs demand and realize even a professional such as RR at best can only pick up on trends that may impact future. So, guess I’m just forewarning the closure of coal plants that may be needed at some point. It’s nice to have backup, redundancy, and options/alternatives. Europe was saved by having old coal plants come to the rescue. We should continue to develop a variety of power production and fuels to stabilize or insulate our economy from unknown future hits. Natural gas is versatile and the fuel enables very efficient and low polluting equipment, but as RR reports were only one hot summer, cold winter, or terrorist attack away from hemorrhaging costs and lost supply. So, all the above strategy is an intelligent decision. Biomass fulfills a portion of that requirement. Value extends to keep paid for coal power plants operating with lower emissions, back up and often lower cost space heating, and increase of motor fuel. Nuclear and coal power only utilized for power generation, so, good to have high percentage of this fuel, especially with such high reserves. Wind and solar is proving to be valuable as we learn how to manage, coordinate production, and improve performance/cost. The decision making process is complex and those closest to problem or closest to the responsibility to make it happen should be given flexibility to utilize diverse mix and coordinate diverse needs and geography. States best arbitrators working with regional power companies best positioned to handle the nuances. Fed should work as coordinator and facilitator where needed. Unfortunately, fed is acting like a tyrant to impose desires. Politics and business have learned to run to DC with money in hand as first step to change. Also, much energy must be devoted to stroking the twitter crowd as they have keypad in hand to malign or support biases.

  3. By Optimist on December 5, 2014 at 9:32 pm

    OT, but I’d like to see a posting on your opinions on how the low cost of crude impacts the energy business and the broader economy. Who benefits the most? Who is hit the hardest? (Putin, put your shirt back on! And all that) Also: how long can it last?

  4. By Poechewe on December 6, 2014 at 12:11 am

    The first graph of the article is an anomaly temperature map and is potentially very useful. But it doesn’t specify the exact time range (year-to-date, estimated for 2014, average for last five years, November?). Also, is there a link or at least a source to it?

    And yes, I also would like to see a posting on your opinions on the falling cost of crude.

    • By Robert Rapier on December 6, 2014 at 8:46 am

      I though that graphic came from the story I linked, but it’s no longer there. So maybe I pulled it from somewhere else. But I can’t find the source now, so I am replacing it with one that has the source clearly indicated.

      • By Poechewe on December 6, 2014 at 3:09 pm


  5. By Forrest on December 7, 2014 at 8:27 am

    So, do colder temps use more gas overall per increased need of heating and lessened need of A.C.?
    I looked up system efficiency of electric water heater, 28.5% vs gas at 93%. This includes energy to produce power. So, it is mind boggling that electric water heaters are so popular in this era of GW concerns? Maybe people are fooled into thinking paying twice as much for hot water is o.k. per the 100% efficiency claim of end user? Same math holds for gas dryers, ovens, and range. If one were concerned of GW, step one would be to inform public of bad choices to cook, dry, and heat hot water. Also, interesting system efficiency of electric space heater is 24% vs NG of 70%. Utilizing the ultra expensive ground source heat pump system will triple the efficiency of space heater, but hardly much above cheap NG furnace. When we save one unit of electric at home we save three units of fuel at the power plant. Geothermal heat pumps may advertise a COP of 4, but they do not include power of water pump as it is to big of a variable. Including this energy, drops COP to 3.
    Advanced combined power plants an efficient alternative to standard fare coal efficiencies.and together with hydro, wind, nuclear will greatly improve the GW math for electric appliances. But for the here and now working with the grid we have, not much sense in utilizing electric for heat. These appliances will wear out before any significant change in grid power. We can save NG by utilizing at point of heat consumption and avoid the power plant. Electric is to valuable, expensive, and polluting to utilize for consumer heat load needs. Biomass alternative is rated excellent per GW pollution and acts as valuable back up independent heat energy. Recent wood and pellet stoves have ultra low particulate emissions with efficiencies 88% or higher in near future. BTW I read aerosol emissions impact on GW is a study in its infancy. The IPCC doesn’t even include the factor that is estimated to account for one quarter of GW influence. What the heck? Were told it’s settled science and this science is in its infancy? For example carbon black will heat up atmosphere but shade more ground heat. Also, the deposits on arctic snow accelerates melting. Volcanoes eruptions have readily decreased surface temps by -.6 C ever decade and did so for several years per the sulfur particulate.

    • By Tom G. on December 7, 2014 at 8:18 pm


      Here is one of my sources.

      A link to your cost information would be appreciated.

      • By Forrest on December 8, 2014 at 7:25 am

        This will get you started. I had many sources and did a lot of surfing. The key word is “system efficiency” which brings wheel to well type calculations for overall efficiency rating. Electric is efficient at point of use, but loses tremendous energy per power generation, fuel supply, and transmission. Pipeline distribution for natural gas is extremely efficient and low cost. Natural gas supply is more efficient to harvest, also. Run of the mill gas hot water heater is very environmentally friendly compared to electric. The high efficient ones even more so. Gas CHP water and space heating is extremely beneficial to environment and doing so with low cost. Generating power at home, at point of consumption is efficient and no hyper expensive grid required. Colleges have been utilizing this process for decades and have achieved low cost power, heat, and almost no outages. Hydrogen fuel cell CHP has very attractive attributes for good balance of power to heat and efficient at low power production. Many believe with the current advent of lower cost fuel cell, this technology will make inroads. Currently, and foreseeable future my utility claims the price of power will climb steeply per the cost of renewable energy regulations. Meanwhile natural gas is dropping in cost.,d.aWw

        • By Forrest on December 8, 2014 at 8:40 am

          Also, people down south utilize hot water solar and claim it is more cost effective than photonics, but it is still expensive and dependent on many factors. Why haven’t the public been educated to benefits of waste water heat recovery as an alternative at 1/5th the cost? It’s maintenance free, 40 yr life expectancy, and has universal application. The heater exchanger will triple capacity of hot water heater, save 60% of shower water heating and overall save 40% of the hot water bill. Guess, it’s not sexy enough? Most do a hard sell on benefits of solar and wind energy at the expense of better choice alternatives.

          • By Tom G. on December 8, 2014 at 3:51 pm

            Oh my goodness. This posting sounds like cheerleading for the natural gas industry. O.K. so here are a few reasons I found on the internet to go electric.

            1. Safety: Your chances of an explosion from a gas leak are much greater than electrocution from faulty wiring to your tank. Plus, the damage to your home after an explosion far exceeds most damage that an electric tank could do.
            2. Ability to install a timer on an electric tank: It costs between $40-$55 and can be installed by the average handy homeowner. We have our timer come on at 5am and turn off at 8am. My wife has enough hot water for her morning shower and evening routine, and we only use 3 hours of electricity max, versus 24. Also, since we’re on time-metered billing, we limit our power consumption to off-peak times.
            3. Cost of installation: With a gas water heater, you must vent the exhaust through a flu. That means you must install PVC tubing up through your home and out your roof. With an electric water heater, you just install a special outlet or bare wiring. No need to saw holes into your roof!
            4. Space requirements: Gas water heaters need at least 6-18″ of ventilation around all sides and top, which means you can’t just install the tank in a small closet or crawlspace. An electric tank can be installed in confined spaces without fear of gas buildup or an explosion. There are even small electric water heaters for under the sink!
            5. Life expectancy: Because electric water heaters use less parts, and subject those parts to less direct heat, they can last years beyond the lifespan of a gas water heater.
            6, Cost of purchase: Electric water heaters cost less than gas heaters of the same size period. Same gallons, same manufacturer and same warranty at Home Depot for Rheem $419 for gas, $298 for electric.

            7. No pilot light: Along the lines of safety, electric water heaters do not use a pilot light, so you don’t need to worry about relighting the flame if it accidentally burns out. However, many new gas heaters use electronic ignitions, not pilot lights, which leads us to…

            8. Gas heaters can no longer use the excuse that they work even when the power goes out: That’s right. Now that many gas water tanks use electronic ignition, when the power goes out, so does your hot water.


            O.K so by now you must realize our discussion is a total waste of time and data bits. For example, I do not have access to natural gas in my community and to pipe it into my home would cost several thousands. I can buy a lot of electricity for that amount of money. Oh almost forgot, I don’t need a carbon monoxide monitor either.

            Also I can not believe you totally ignored the carbon aspect of burning a fossil fuel like natural gas. Of course the same can be said for electricity generated by natural gas. At least with solar, wind, hydro or geothermal it can be mostly carbon free. And let us not forget the hundreds of thousands of gallons of diesel it took to dig the trenches and burry the gas pipelines. And they are certainly not maintenance free. Just ask some of the people who had their homes burned to the ground by a gas line that burst and then erupted into flames taking out an entire neighborhood.

            And combined heat and power [CHP]. Yes this might be good for colder climates but here in Arizona it would be a total waste of money. Heat is our problem not cold. No one in their right mind would run a CHP in the summer. Should we also ignore all of the materials it takes to build a home CHP internal combustion engine powered system? My winter heating bill is less than $1.00 per day even on the coldest days. However, I can spend $5.00 per day on AC. However, my heat pump does both. And of course a CHP unit does need fuel and those fuels are mostly carbon based. I guess it boils down to you either care about CO2, methane and other fossil fuels or you don’t. I have always prefered to think about what might work best to obtain “clean air to breathe and water to drink.”. In my book; our electric grid continues to get cleaner every day as we add more renewable energy..

            And of course you are correct – natural gas is cheap now however that has not always been the case and it may NOT be the case in the future. When you buy into the fossil fuel industry you put yourself at the mercy of that industry. When you buy into the renewable energy industry you are buying personal freedom. However, I will not argue the point that at the moment wind, solar, hydro, geothermal and other renewables MAY be more expensive at some locations in America. By the same token renewable in Arizona are cheaper NOW than either natural gas or propane and costs are expected to fall even further. How much further do you expect natural gas prices to fall before they head back up. When you buy a solar array it is a 30 year investment in a stable supply of energy at a mostly fixed cost. During the next 30 years can you say the same for natural gas prices?

            Have a good day Forrest.

  6. By dipchip on December 15, 2014 at 7:00 am

    What is the ratio of NG produced from Oil wells versus Gas wells? I would suspect that with all the new shale oil wells, gas production from these wells has moved the ratio. Is this the reason for most of the increase in NG production ?

    • By Robert Rapier on December 15, 2014 at 10:49 am

      I am going to have to dig this up, because a lot of people have been asking me that. But most of the new production is from dedicated gas wells. A lot of the associated gas is being flared. It will make some impact if oil producers scale back, but it won’t be huge.

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