Natural gas prices have spiked over the last few weeks as U.S. inventories run low ahead of the peak winter heating season.
Nymex natural gas prices have jumped nearly 15 percent over the past month, rising to roughly $3.30 per million Btu (MMBtu). The market has clearly grown a little concerned about adequate supplies heading into the winter and that is reflected in natural gas prices rising to their highest point since the beginning of the year.
For the week ending on September 28, natural gas inventories stood at 2,866 billion cubic feet (Bcf), or 636 Bcf lower than at the same point a year earlier, as well as 607 Bcf below the five-year average.
Inventories dropped to extraordinarily low levels last winter as much of North America became enveloped in exceptionally cold weather. As tens of millions of people cranked up the heat, the U.S. burned through record levels of natural gas. That stood in stark contrast to the year earlier, when a much milder winter led to above-average levels of gas in storage.
Natural gas markets are cyclical, with a buildup in storage between April and November – the so-called “injection season” – and steep drawdowns during the winter. The stockpiling during injection season is necessary to provide enough supply to consumers for winter heating needs.
But the problem is that the U.S. is currently on track to finish up the injection season with the lowest level of gas sitting in storage in 13 years. Even though demand sees seasonal peaks and valleys, consumption is rising on a structural basis as more coal plants shut down and more gas is exported in the form of LNG. That trajectory has been clear for much of 2018, but up until only recently, traders were not concerned about shortages. Natural gas production continues to soar, and several new pipelines in the Appalachia region are expected to unlock new markets, allowing drillers to produce eve more natural gas. For example, just days ago, the Atlantic Sunrise pipeline came online, connecting more Marcellus shale gas to the U.S. south. Investors saw this as a boon to natural gas drillers – Cabot Oil & Gas saw its share price jump on the news since it can now ship more gas out of the Marcellus.
In short, despite low inventories, traders have not been concerned about the natural gas supply/demand balance heading into winter. That is, until recently.
Record power burn over the last few weeks from unseasonably high temperatures put more strain on inventories. According to S&P Global Platts, U.S. gas demand has averaged 72.5 Bcf/d since September 1, up 9 percent over the same period last year. Adding to the market pressure is a series of nuclear outages, pushing more gas-fired power plants into service. Overall, U.S. power burn is at a record high so far in October.
Compounding matters, temperatures in the U.S. Midwest and Northeast are about to plunge, dropping from the mid-80s F in many places down to the mid-50s F or even mid-40s F. It’s almost as if we are going to flip directly from summer to winter, bypassing the low-demand period of autumn. The pressure on supply does not bode well since we haven’t even entered the drawdown season yet.
Nevertheless, this does not mean that a price spike is inevitable. “Because the factors that drove cash market strength over the past month – namely, a very warm September and multi-year highs in nuclear outages – are temporary, we believe cash prices will come back down to earth once these fundamental supports wear off,” Barclays analysts wrote in an October 4 note. “We remain bearish versus NYMEX futures, but we have raised our 4Q18 and 2019 forecasts to $2.95 and $2.72, respectively, to reflect lower storage.”
However, the investment bank acknowledged that with inventories at their lowest level in more than a decade, the market has “very little cushion to withstand weather demand swings,” leaving pricing risk skewed to the upside. Volatility is on the rise and the market will “balance on a knife’s edge in almost any weather scenario,” the bank concluded.