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Cutting It Close:

What a hot summer has meant for record storage inventories

September 1, 2016 | By Callie Kolbe

Last week the Energy Information Administration (EIA) reported that U.S. natural gas storage inventories increased at a slightly lower rate than expected for the week ended Aug. 19. Inventories were reported to have reached 3,350 billion cubic feet (Bcf), which is 275 Bcf (9%) higher than the corresponding week last year.

Following suit, on Aug. 29 the CME/NYMEX Henry Hub natural gas futures prices for September delivery closed at $2.67/MMBtu, or 31 cents lower than last year at this time. Additionally, at the end of last week the current spot price for August gas averaged $2.81, just 1 cent lower than last year at this time.

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In today’s Get the Point, we look at how inventories got to this point and what the implications will be for the winter market.

The analysis starts with looking at gas demand in the last several months. And that starts with the weather.

Early spring baseload gas-fired fuel switching has combined with concentrated hot weather throughout June, July and August to create record-setting gas demand for power generation and has left the gas storage market in a much tighter position than where it started the summer. This past June marked the warmest average temperatures ever recorded across the lower 48 for the month. July and August followed with above-normal temperatures across the majority of the continental U.S. Specifically, the Southeast region has experienced temperatures well above normal over the last two months, with record temperatures in Florida. Above-normal temperatures have tightened the supply-demand balance considerably since the summer injection season began on April 1, 2016.

The impact of hotter weather has been obvious. Power demand for gas in July and August has shattered previous records set in 2012 and reached an average above 36.0 Bcf/d for each month. The previous single-month record was July 2012, when power demand averaged 34.8 Bcf/d for the month.

But the story isn’t just on the demand side. This summer to-date has averaged 1.1 Bcf/d net shorter dry gas production as compared to the same period a year ago. Canadian exports to the U.S. averaged 0.6 Bcf/d less this summer than last summer.

Regardless, the net effect remains that PointLogic flows indicate that available dry supply overall to the lower 48 remains 0.5 Bcf/d lower than where it stood at this time last year (see graph below). As a result of a tighter market, weekly working gas inventory deltas have consistently come in with lower seasonal injection rates this summer than in prior years.

S&D Fundamentals: Summer 2016td v Summer 2015td

End-of-Season Balance

Because we began the summer with a large surplus, the tighter summer market has eased the summer storage inventory situation only slightly. PointLogic sees inventories on track to end October near last year’s record high between 3.9 trillion cubic feet (Tcf) and 4.0 Tcf. This is in contrast to early-summer expectations of an ending balance well above 4.0 Tcf.

While dry gas production has begun to recover in August compared to June and July production, it is anticipated to remain relatively flat near 73.0 Bcf/d through the end of the injection season. However, continued expectations for above-normal weather-support demand (see map below) indicate that we will experience lower-than-average injection rates throughout September and October.

NOAA

Coupled with NOAA’s expectations for a warmer than usual September across the Southeast and West, PointLogic predicts that power burn in September will likely break another record for the month and could be as much as 0.3 Bcf/d higher than September 2015. October is expected to follow suit and come in nearly 1.0 Bcf/d stronger than it did last year.

At these high levels of power demand, storage inventories are projected to reach 3.96 Tcf by Oct. 31, 2016. This would be barely 20.0 Bcf higher than last year’s end-of-season balance (see graph below).

Lower 48 Storage Inventory

That said, storage injections typically continue well into November in all U.S. regions. Storage levels did not hit peak levels last year until the week ended Nov. 18, 2015. In comparison to last year, all regions, except for the Pacific are at higher inventory levels as of the week ended Aug. 19, 2016, indicating that if power demand does not come in as strong as expected, inventory levels will easily surpass the records set last year.

Like last year, the salt-dome facilities, despite recent strong withdrawals, are treading close to record highs. Current inventories sit at just 5.0 Bcf higher than last year at this time at just under 300 Bcf. Last year, the salt fields reached a record high of 382 Bcf towards the end of November. As the most flexible storage fields, it would just take a few weeks of unexpected mild temperatures to edge the salt storage inventories above last year’s record. As such, the impending shoulder season activity at the salt fields in the South Central region might just be the proverbial “canary in the coal mine” as we watch for changing demand patterns and the overall impact on storage levels this fall.

On the other hand, the Mountain region has already surpassed last year’s peak and is well on its way towards setting a new record high. Additionally, the East and Midwest regions currently stand at inventory levels slightly above where they were estimated to have been at this point in August last year. These levels have been reached despite new highs for power demand this summer, as well as in the face of additional flows leaving the Northeast region to supply neighboring regions (see table and graph below).

PointLogic Energy, EIA Map

Will another season-ending inventory near 4.0 Tcf carry with it another winter of weak prices across the country? Weather will ultimately dictate the extent to which we will see stronger prices; however, heating demand aside, the country has also experienced some structural demand growth in comparison to last year. PointLogic expects that export demand for gas to Mexico and in the form of LNG exports will rise by nearly 1.6 Bcf/d this winter as compared to last winter.

While total supply will also increase this winter season, structural demand gains on top of heating demand will help to pull down high storage inventories more quickly this year. Even though the gas market will again enter winter with storage inventories near 4.0 Tcf, the fundamental shift in demand will lessen the impact of the over-supplied condition and provide upward pressure on prices compared to last year.

To follow the fundamental changes to the natural gas market, check out PointLogic Energy’s Supply and Demand Market Module. Additionally, current subscribers can access PointLogic Energy’s most recent fundamental expectations through Summer 2018 in its Two Season Balanced Forecast in the Download menu on our website. Stay tuned as we monitor and project changes in the ever-evolving supply and demand picture for natural gas.

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