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Monday, February 10, 2014

More on the Game-Changer Narrative

Note: This update follows my commentary posted last week documenting emerging changes in the U.S. natural gas market picture and discussing whether the altered picture will occasion additional repricing upward to balance supply with expected demand increases.
--Michael Vickerman

On February 6th, EIA reported that natural gas storage volumes were 270 billion cubic feet (bcf) under last week’s withdrawal numbers.  That number reflects data submitted to EIA on January 31st.

Going into February this year, the quantity of natural gas in storage (1.923 bcf) is half of what it was at the start of the current heating season (3,834 bcf). The heating season generally ends around April 1.
I expect the next EIA report (February 13) to easily surpass the 200 bcf threshold.

In the previous 10 years, the largest amount of gas withdrawn from inventories during the entire heating season was 2,311 bcf. That occurred during the winter of 2007-2008. Thus far this season, a total of 1,911 bcf has been taken out of storage. If the next two reported withdrawals (Feb. 13th and 20th) exceed a combined total of 400 bcf, this winter’s withdrawals will exceed that total, and that will happen before the end of February.

Though this is shaping up to be the coldest winter in 20 years, the price of natural gas still remains below $5.00. How many more weeks of below-average temperatures will it take to move the floor price of natural gas to $5.00 and higher? The game-changer narrative is still hanging tough.

Over the weekend, I checked Chicago and Madison weather forecasts for the week of February 10th. To the extent there is a warm-up in sight, it will happen Thursday and Friday. This respite will bring temperatures back to seasonal levels, but don’t expect it to last. The weather forecast in Madison for the Valentine’s Day/President Day weekend heralds a return to below-normal temperatures.

The cold weather is also taking a bite out of current extraction volumes, as evidenced in the highlighted passage of the Bloomberg News article below. While pace of extraction will definitely pick up as winter gives way to spring, the question going forward is whether supply can increase by a record-setting 2.7 trillion tcf between the end of the current heating season and the beginning of the next. We’re starting to enter uncharted territory.

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