Natural gas storage can be thought of as the residuals of supply and demand – when United States gas supply exceeds consumption, the gas that’s leftover heads into storage. Because of this, the figure is commonly looked at to assess the pulse of the natural gas market.
Today, the natural gas market pulse is connected to the strong supply of the U.S. shale boom. On November 10, the EIA announced total natural gas storage levels had reached 4,017 billion cubic feet (Bcf), setting an all-time high and busting the previous record set just last year. Of course, while shale gas might explain the broader trend, understanding the impact on overall energy economics means looking at some of the more specific reasons as well.
Total natural gas storage levels have risen to a record high for a second consecutive year.
One reason for the new record is storage levels finished the withdrawal season in March well-above normal – following an unusually mild winter season. Despite production idling lower throughout the summer – due to low prices and power generation demand soaring on record heat – inventories hovered above the five-year range throughout the summer.
Injections into storage typically happen from April through October, while gas suppliers withdraw from inventories to meet winter heating demand from November to March. However, during stretches of mild weather those timelines can fluctuate, as observed in the last two years when above-normal temperatures led to storage injections into November.
Above-normal inventories at the end of winter overshadowed weak injections last summer.
The rise above 4 Bcf surprised most considering production continued to slump and demand strengthened. Total storage injections averaged just 70% of the five-year average and 62% of last year, as production eased under healthy supply. Structural demand increased from power generation demand, exports to Mexico and LNG exports resulted in many calling for a peak level of 3,900 Bcf or even lower based on the injection pace through September. However, as illustrated by the chart above, the strong start to this year’s injection overshadowed other factors that might have led to a lower amount of gas in storage.
Looking at how to use storage as a way to gauge natural gas market trends, in addition to the total volume and the change week-to-week, storage is frequently compared to where it stood the previous year as well as the average over five-years. The polar vortex during the 2013-2014 winter made storage fall 1000 Bcf below the five-year average and prices spike as high as $6/MMBtu. Just a few years later, the picture flipped after one of the warmest winters on record, and prompted prices to slip to a 17-year low, down to $1.60/MMBtu.
Prompt month NYMEX prices and the storage surplus/deficit show an inverse relationship.
Another way to think about storage and price is how the year-over-year changes between the two relate. The graph below shows the changes year-on-year in storage and natural gas prices each month. Prices tend to move at a similar rate over time as storage fluctuates. Deviations from this relationship are typically a result of investors betting that the near-term bullish or bearish trend will continue, causing price to move quickly relative to the move in storage. However, as observed with the recent fall in prices, these deviations can correct quickly.
Year-on-year changes to storage levels tend to indicate where prices are heading as well.
As a whole, the natural gas market has a wide array of factors influencing prices at any given moment. The market is impacted by predictable seasonal trends but, on the flip-side, it’s also impacted by highly unpredictable factors like weather. While there may not be a single number that predicts future cost, natural gas storage continues to be the most useful data point for understanding natural gas economics in today’s world.
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