Depleted natural gas inventories may not recover until fall

Jan. 20—Cold-depleted inventories have supplanted supply growth as the market focus for natural gas. Prompt prices that traded comfortably between $3.50 and $3.80 from late summer through November rocketed higher, surpassing the previous one-year high to close at $4.538 per MMBtu in late December. The month’s heating demand was more than 7 percent above normal on a population-weighted total degree day (TDD) basis. In other words, it was a heck of a lot colder than normal. I’ve heard Eskimos have many words to describe snow. After the recent cold stretch we have a new phrase, as the term “polar vortex” entered the lexicon as the way to say “it’s cold.” 

The spiking heating demand was reflected in natural gas inventory levels. December’s all-time record for storage withdrawal in a single week, at 285 billion cubic feet (Bcf), was eclipsed a month later with a 287 Bcf withdrawal that disappointed expectations of 300 Bcf. January’s end promised a third big shot of cold air. Storage inventories were expected to dip below 2,000 Bcf by Jan. 31, bringing inventories roughly 750 Bcf below last year. Storage typically bottoms out near the end of March at around 1,600 Bcf, rising to 3,800 Bcf by summer’s end. Under current conditions, even reaching 3,800 Bcf by November seems unlikely, unless a strong run of warmer-than-normal weather allows inventory recovery. In response, prices have pushed up above $4.50 for the prompt NYMEX contract. That will be sufficient to limit natural gas consumption for power generation, but the demand reduction implied by fuel switching may also not be enough to rebuild inventories. Thus, prices will likely stay elevated through summer.