Nat Gas Inventory Replenishment Challenge

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Nat Gas futures prices are back in the $4.30/mmbtu to $4.70/mmbtu trading range after a very short journey into the next lower trading range. As shown in the following chart of the spot continuation Nymex Nat Gas contract the market has been mostly trading in the aforementioned trading range as the major run-up in prices due to the colder than normal winter weather subsided. 

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With the exception of the high volatility winter price surge that occurred during the period from the second half of January to the second half of February the current trading range was also in play going back to early December of last year. From a technical perspective the boundaries of the current trading range have been tested many times and for the most part have held suggesting that this is likely to be the range that could be in play as the industry works its way into the lower demand shoulder season.

As I have been discussing for several months the industry is facing a significant challenge to replenish total Nat Gas inventories back to “so called” normal or comfortable pre-winter levels. The five year average injection rate has been about 2.04 TCF. To get back to the five year average the industry will have to add about 3 TCF into inventory or about 985 BCF above the normal injection level or an additional 33 percent more Nat Gas. In fact I do not think the industry has ever injected this much gas into the storage during the injection season.

In the last EIA Short Term Energy Outlook report (March, 2014) the EIA is forecasting a 2.5 percent increase in Nat Gas marketed production across the year. The following table extracts out a comparison covering the traditional injection season of April through November. The table compares marketed Nat Gas production in 2013 versus what the EIA is projecting for 2014 for the injection season. As shown if the actual production levels are in sync with the latest round of projections there will be an increase of about 350 BCF in production this season over what was available last year.

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As mentioned above the industry will have to inject an additional 985 BCF into inventory over and above what has historically been injected into inventory using the five year average as a reference point. The potential additional production covers about 35 percent of the 985 BCF increase required. Thus there will still be a gap of about 635 BCF assuming all goes as projected with production this year.

Also the projections for supply gains do not incorporate any major outages due to an active hurricane season, especially in the Gulf of Mexico. In addition it is still an unknown as to how the summer cooling season will evolve this year. Certainly a hotter than normal summer will impact the amount of additional Nat Gas production that would be available for storage injections.

In summary I do not think it is going to be a slam dunk or anywhere near a given that the industry is going to be able to replenish inventories back to the normal or five year average level ahead of the 2014/15 winter heating season. So far market participants seem to approaching this major topic with a high level of caution as price levels do not currently reflect any risk premium related to ending the injection season at a level well below the normal pre-winter level.

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