Published to LuthINformed, Issue 6 (July 6, 2016)
In this issue, we offer a look at natural gas storage and its correlation to prices. We hope to provide our readers with guidance and actionable information that will be both valuable and useful. As always, your feedback is welcome…
The Impact of Storage on Natural Gas Prices…
As we’ve discussed in previous newsletters, weather, economic growth and other factors all impact natural gas price trends. However, short-term prices often react most quickly to the EIA Storage Report announced each Thursday at 10:30am. There are three primary supply-side factors that affect natural gas prices:
- Variations in the amount of natural gas being produced
- The volume of natural gas being imported and exported
- The amount of gas in storage facilities
Price volatility often peaks when the EIA announces unexpected storage levels versus the five-year average level. That is to say, the rate at which storage levels move away from prior levels plays a role in creating periods of high volatility. Of course, weather extremes dramatically impact storage. Our last issue on the 2014 Polar Vortex made this relationship very clear. However, storage operators have the ability to vary their rate of injections during the summer to address imbalances – and to maximize their financial positions. They typically inject at a slower pace in order to meet summer cooling demand, but they must also inject to sufficiently meet next winter’s heating demand.
Storage vs. NYMEX Settlement…
A commonly asked question is whether storage levels are correlated to NYMEX prices. The chart above illustrates the inverse correlation between natural gas storage levels and historical NYMEX settlement prices over the past three and a half years. During the polar vortex of 2014, storage levels fell to their lowest while prices reached highs. Last winter (2015-2016) was one of the warmest on record – storage levels peaked and prices have fallen. Over the past few months, volatility has lessened and is similar to that seen during the spring of 2012 – the last time inventories were near current storage highs. Add to this picture a general winter warming trend as the chart below demonstrates. This, in addition to recent high production levels, may lead to higher storage levels as we move into the winter heating season.
How the EIA Gathers Storage Data…
The U.S. Energy Information Administration (EIA) collects data on end-of-week working gas in storage at the company and regional level from a sample of all underground natural gas storage operators. Data is also published at a state level in Natural Gas Monthly which includes tabulations of base gas, total inventories, total storage capacity, injections, and withdrawals at state and regional levels.
How is Natural Gas Actually Stored?
Natural gas is primarily stored underground and most commonly held under pressure in three types of facilities: depleted gas reservoirs, aquifers, and salt caverns. The principal operators of underground storage facilities are interstate pipeline companies, intrastate pipeline companies, local distribution companies (LDCs), and independent storage service providers. About 120 entities currently operate the nearly 400 active underground storage facilities in the Lower 48 states.
The latest inventory report (above) shows a net increase of 37 Bcf vs. the previous week. Stocks were 582 Bcf higher than this time last year and 627 Bcf above the five-year average. Immediately following the release of the report, the futures curve rose. The build was less than anticipated, and traders considered the report bullish. Current strip prices are listed below:
12 month strip = $3.053
24 month strip = $3.075
Cal Year 2017 = $3.154
Cal Year 2018 = $3.022
(all prices NYMEX only; A/O 7/5/16)
For an in-depth discussion on markets, purchasing strategies and other topics, call us here at Luthin Associates. We offer our clients regular market updates and our Energy Procurement Group is staffed with certified experts on energy market conditions.
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