Natural Gas Storage Crunch - Look Out Below

DJ Natural-Gas Storage Crunch: Look Out Below -- Heard on the Street

By Spencer Jakab

     Although it isn't a liquid, "drop in the bucket" is an apt description of energy traders' reaction to a mildly
encouraging bit of news about natural gas.

     Underground storage of the fuel fell by 48 billion cubic feet in the week ending Feb. 26, according to a report
Thursday by the U.S. Energy Information Administration. That drop was about six billion more cubic feet than expected.

     Prices promptly fell anyway to a nearly 17-year low. And there could be more declines to come--perhaps into
uncharted territory.

     The amount of gas remaining in reserve with just a month left in the unofficial "withdrawal season" is now a
record 2.536 trillion cubic feet. That is nearly 50% more than the norm for this time of year. Without much heating
demand remaining this winter, exacerbated by above-normal temperatures expected next week in the Northeast, storage
will almost certainly end the season as it began, at a seasonal record.

     That might bring an unusual and unprecedented problem: The time that used to give traders palpitations was the
so-called withdrawal season. This occurred during winter months when people in the Northern Hemisphere use more gas.

     The issue is that there are only so much production and storage. So it is possible to run out of or even deplete
inventories to dangerous levels. Back in 2005, several weeks after Hurricane Katrina tore up vital Gulf Coast
infrastructure, the prospect of a frigid winter sent natural-gas futures to an all-time high nearly 10 times today's
level, topping $15 per million British thermal units.

     On the other hand, having ample reserves was always seen as a nice bit of insurance. While this perhaps dashed
hopes of speculators, it certainly wasn't a source of disruption.

     Now, though, the "injection season," the period from April through September when gas stockpiles build, could be
the one to worry about. By late summer or early autumn, a summer like 2015 could result in gas with literally nowhere
to go. Already there are parts of the country such as the Marcellus formation in Pennsylvania with cash prices around
$1 per million British thermal units. Futures prices are still above $1.60.

     Industrial demand and liquefied natural gas exports may help at the margin, but not enough to move the needle. And
what if demand is especially strong this summer due to weather?

     While lacking the impact of a frigid winter's heating demand, a scorching summer means more gas is used for power
generation when air conditioning demand surges. Unfortunately for gas producers, a large number of completed wells are
on standby as companies balk at selling into a glutted market. They would plug any shortfall and undercut any rally.

     That leaves natural-gas prices with nowhere to go but down and, in some areas, way down--perhaps near zero if
producers get desperate.

     Summer is coming.


  (END) Dow Jones Newswires

  March 03, 2016 13:20 ET (18:20 GMT)

  Copyright (c) 2016 Dow Jones & Company, Inc.

030316 18:20 -- GMT
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