Goldilocks and the Three Winters – How Natural Gas Storage Recovered From The Vortex

From a high of $6.14/MMBtu in February 2014 natural gas prices have fallen to $4.013/MMBtu yesterday (September 17, 2014). In large part the price decline reflects the recovery of gas storage levels from record lows in March at the end of a freezing winter. Booming production and a milder summer have provided the surplus supplies needed for injections to replenish inventories reasonably close to normal levels (the latest storage numbers are released by the Energy Information Administration (EIA) this morning (September 18, 2014). Today we describe the impact of supply and weather driven demand on storage levels.

This blog is one of our regular high-level analyses of fundamentals in the natural gas market, reviewing developments this year and looking ahead to the winter of 2014/2015. For more detailed regular updates on North American natural gas markets take a look at the weekly markets articles supplied to RBN by Kyle Cooper. These are usually posted on a Monday – you can see the latest one here – and cover supply demand fundamentals in the gas market during the prior week. Look for the links to Kyle’s contributions that appear in our Monday blog.

The US natural gas market is perennially focused on the issue of storage. Natural gas underground storage follows a strong seasonal pattern because producers and buyers inject gas into storage during the summer months when demand is lower and then extract gas during winter months when demand for heating exceeds the supply from current production. For more about the location, use and types of natural gas storage see Bright Lights Big City. The gas market watches storage levels closely to understand where supplies will be in the lead up to winter since perceived and actual shortages of gas can lead to big price hikes during cold weather. Generally, the injection of gas into underground storage during the summer and depletion of supplies by withdrawals during the winter is a reasonably smooth process. However, in two of the past three winters the storage market has been roiled by weather extremes. In fact the impact of climate on gas storage in the past three years resembles the fairy tale of Goldilocks and the Three Bears with one winter being “too hot”, one “too cold” and one “just right”. 

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Figure #1 below shows US natural gas total underground storage levels since the start of 2012 as reported by the Energy Information Administration (EIA) - red line on the chart. The blue line on the chart is the average of the prior 5 years of weekly storage levels (2009-2013)  – effectively the recent norm. Actual storage levels have veered away from that norm significantly twice in the last three years. First they stayed at unusually high levels during the winter of 2011-2012 – ending the storage season in March 2012 at record levels above the 5-year average because the weather that winter was “too hot” and less gas was needed from storage to meet demand (purple dashed circle on the chart). As a result of the abundant supplies left in storage the following month (April 2012) the price of CME/NYMEX gas futures for delivery at the Henry Hub in Louisiana collapsed to less than $2/MMBtu. That natural gas price collapse led to an increase in demand for natural gas fired generation (because gas was cheaper than coal) that helped to suck up surplus supplies so that storage levels were closer to normal at the start of winter 2012-2013. That “middle” winter in the chart turned out to be “just right” as storage levels kept relatively close to the 5-year norm.