Natural gas prices hit upper boundary last month

The following natural gas market analysis was written for Ethanol Producer Magazine on Dec. 23, 2013. Author's commentary reflects prices and market conditions at that time.   

A cold start to the winter heating season increased home heating demand beyond seasonal norms, depleting inventories at an above-average rate. Consequently, the remaining inventory has become more dear, near-term pricing has risen and the futures market has moved from a slight contango to backwardation. The prompt NYMEX contract traded near $4.50 per million Btu (MMBtu) for most of December.

The effects of increased heating demand were reflected acutely in national storage levels. Inventory peaked Nov. 11 at 3,834 billion cubic feet (Bcf), a comfortable surplus to the five-year average of 3,776 Bcf. Depletion occurred rapidly, culminating in an all-time record single week withdrawal of 285 Bcf on Dec. 13, bringing stored gas volumes to 3,248 Bcf, a 7.4 percent deficit to the five-year average. The three-week stretch of cold not only supercharged withdrawals, but also wreaked havoc with supply. Subzero weather in the Rockies and subfreezing temperatures in Oklahoma and Texas froze off production from some wells. At the peak of the cold, the research firm Bentek estimated that as much as 3 Bcf of supply was unavailable.

Between constrained supply and spiking demand, prompt NYMEX natural gas prices broke out of a 13-week range from $3.50 to $3.80, to test and exceed April-May highs. Although prompt and spot prices have risen, deferred futures have been less sensitive to the recent demand spike. This near-term volatility combined with longer-term stability is indicative of a supply-demand scenario where long-term supply and demand balances are looser than the short-term.

Although continued cold would lead to elevated demand levels, a key reason that prompt and long-term prices have not run higher is electricity generation. If NYMEX prices were to rise above $4.50 per MMBtu, natural gas would no longer be competitive in certain areas. Analysts from SNL Energy and Goldman Sachs estimate 1 Bcf per day of natural gas demand for power generation would drop out of the market if prices exceed this threshold. Heating demand from an excessively cold winter could be the catalyst to break through this resistance, but the weather forecasts, and present storage balance are not sufficient to warrant that type of price move at this time.