by Ed Fortunato
Constellation is an IMA Member
You may have noticed while tuning into Constellation’s monthly Market Intel Webinars that there is always discussion surrounding gas storage. In this blog post, we go into detail about the topic:
Gas storage figures are a crucial factor in the gas business. It’s the one weekly number that gives us a view of the overall balance of gas supply and demand. This supply and demand affects natural gas prices, which then impacts power prices and your overall energy bill.
Storage as an Indicator of Demand
The storage number offers indication of what type of demand we are encountering. Low storage, which relates to total heating-degree days plus cooling-degree days generally indicates unusually strong demand.
Demand variations generally appear in residential and commercial categories due to inelastic demand (e.g., when it’s cold out, people turn up their thermostats or when there is a heat wave, they turn down their thermostats), whereas industrial use is stable and estimable as only a small portion of electricity is typically used for heating and cooling.1
In winter months, a stronger than-expected-storage withdrawal indicates stronger-than-expected demand and vice versa. On average, about ~2,000 Bcf of gas is withdrawn from underground storage, and that same amount is reinjected into storage during the April to October months, but those numbers can swing by several hundred Bcfs based on weather.
A winter that is colder than normal (remember 2014’s vaunted Polar Vortex?) will deplete inventories at a higher-than-normal rate, thus leaving less gas in storage at the end of March. In general, this requires increased gas prices to increase gas production and refill storage for the following winter. Conversely, a mild winter, such as that of 2015/2016 led to record inventories in March 2016 and 18-year low prices of $1.66/MMBtu on NYMEX, will drive prices down.
Storage’s Impact on Gas Prices
The difference between gas oversupply and undersupply is a simple number that can provide insight on the entire gas complex. Excess gas supply minus demand is injected into storage, whereas with a supply deficit, more gas comes out of storage. When we have an oversupply (i.e. high levels of gas in storage), prices move lower. When we have an undersupply (i.e., low levels of gas in storage), then prices move higher.
Within the Energy Information Administration (EIA) gas storage report released every Thursday morning, there is not only a storage number, but also additional information about whether that number is ahead of or behind the previous year and the five-year average.
When you compare the storage number to historical figures, you can come close to estimating temperatures. For example, every heating-degree day (HDD) produces a certain amount of corresponding demand that can be forecasted in the weekly storage numbers (i.e., a greater-than-average level of population-weighted HDD should result in a higher-than-average storage withdrawal). As a storage deficit widens over time, the NYMEX 12-month strip price should rise to incent more production to come online. As a storage deficit becomes a surplus, prices should decline.
To view the original article, click here.