Natural Gas Corner - The Month In Review And A Look Ahead

The natural gas market began this current winter with a record amount of gas in storage of 4,009 Bcf (billion cubic feet) surpassing the previous peak storage high of 3,929 Bcf reached in 2012.  Storage has since fallen to 3,297 Bcf but is 16.7% above the 5-year average and 23.6% above last year’s storage level.

The warmest December on record in the U.S. combined with 3 storage injections during the month of November help push the spot price of natural gas to a new 14-year low at $1.684/MMBtu by mid-December.

Winter weather demand finally arrived in mid-December helping to rally the market higher as shorts were forced to cover and the spot price rose by .811 or 48% topping out at a $2.495/MMBtu high in early-January.  As weather forecasts turned milder, the market once again fell back lower to the current $2.100/MMBtu level negating roughly half of the December/January gains.

While a winter weather system across the upper U.S. is providing some support to the market, weather-related heating demand is not expected to remain high enough to draw down currently record high stocks for this time of year.

Over the first 11 weeks of this winter’s withdrawal season which officially started the first week of November, only 688 Bcf of gas has been pulled from storage in comparison to 1,004 Bcf withdrawn over the past 5 years, a decrease of 316 Bcf of 31.5%.  With 10 weeks left in this withdrawal season, there will likely be a historically large amount of gas in storage at the end of this upcoming March. 

During the last 5-years, there has been an average of 1,199 Bcf withdrawn from storage over the next 10 weeks.  With 3,297 Bcf currently in storage, there will be 2,098 Bcf of gas remaining in storage at the end of March 2016 if the 5-year average withdrawal is replicated this year.  2,098 Bcf would be 473 Bcf or 29% above the 5-year average of 1,625 Bcf for end of March storage, but well below the all-time high of 2,472 Bcf reached in March 2012.

Unless winter heating demand markedly increases as current weather forecasts do not suggest, end of March storage in 2016 will likely be the second highest on record.

While prices may remain weak near term, the possibility for a drop in natural gas production later this year could become a supportive factor for the market.  Dry-gas production in late-December rose above the 73 Bcf per day level but has since declined to 71.4 Bcf per day earlier this week according to Bentek.  With the natural gas rig count currently at an all-time low 135 rigs for week ended 01-15, down 92% from 2008, 2016 could finally be the year production is impacted as lower prices bankrupt the more inefficient producers.

Upcoming weakness over the next few months could be the final opportunity to add to forward coverage in the natural gas market near a 14- year price low.