Commodities: Natural gas prices fall as storage issues resolve
As of April, storage inventories had been hugely depleted by a bitterly cold winter. Concern over low adequate supply manifested itself in the form of elevated prices. Refilling storage inventories would alleviate some of the perceived risk for winter prices but could only be achieved through some combination of changes to supply and demand to allow for a higher rate of injection than had been observed in any of the last five years. The most likely scenario for this happening was a combination of stronger production and weaker demand. Consequently market participants were weighing the risks associated with two key drivers of storage inventory recovery. First, would there be sufficient growth in production to help with a recovery? Second, would power generation demand divert volumes inhibiting storage rebuild?
From the production perspective, 2013 came on the heels of a historically low priced natural gas market in the prior year. The low prices provided scant incentive to the exploration and production community to aggressively drill new wells, and year-over-year production growth in 2013 of only 1.1 percent from 65.74 Bcf per day on average to 66.5 Bcf per day. Last year’s prices were only marginally better than the prior year raising some concern as to whether the 3 percent to 4 percent growth rate of domestic production observed from 2009 to 2012 was gone, and the market would not be able to produce its way out of the storage inventory deficit.
From the demand side of the market, power generation demand was going to be the make or break factor for storage recovery. Industrial, residential, and commercial demand are smaller components of the summer market and also more stable than power demand. As such, high prices could help drive gas to inventories if coal fired generation was more economic than natural gas, but substantial amounts of summer heat could upset the market with power demand calling on both gas and coal-fired generation assets.
Although injections were off to a rocky start early in the summer, both of the key risks for storage recovery appear to be greatly reduced. Year to date, domestic production is up a robust 2.4 Bcf per day or 3.7 percent versus the same period in 2013. On the power generation demand side of the equation, high prices held demand growth versus 2013 in check from April through June. July and August are the peak demand period of the summer, with the highest risk of hot weather diverting natural gas to power generation and away from storage, but mild temperatures for the month and a moderate forecast for the start of August, have taken much of the sting out of weather risk. With these benign fundamentals at play, inventory levels have staged a nice recovery. While the season ending storage inventory is still not likely to reach the lofty levels we have become accustomed to in recent years, with stronger domestic production a slightly lower inventory level appears to be acceptable to the market. Near term New York Mercantile Exchange (or NYMEX) prices have fallen out of the trading range between $4.85 and $4.25 in response to the positive fundamentals and are currently offered below $4.