Thursday, January 16, 2014

Record Natural Gas Storage Withdrawal -287 BCF

Today's announced withdrawal of -287 was a record but it disappointed expectations of -300.  Gas prices remain firm but did not rally on the news.  The structure of the NG Future Strip indicates that the primary concern is one of inventories, not supply and demand structurally.

Natural Gas Weekly Storage Report

Speculation that storage could drop to dangerously low levels by end of winter is likely driving the bidding for FEB and MAR contracts.  However, as winter is now past the midpoint, and the probability of supply-hampering well head freeze-offs declines (gradually), the focus will return to production.  The range of storage outcomes at the end of March is beginning to narrow.  My estimates still point to the 1.2 - 1.3 TCF range as shown, and the confidence interval is tightening to about 800 - 1,600 BCF.  That should narrow dramatically in the next two weeks, for all analysts as well.

This is low, much lower than last year, but has been seen in the past and is likely to be manageable.  If forecasts persist with anomalous cold for much longer, the low end of the range will appear more probable, and the market has only one real choice to preserve inventory in the short term....pricing above the Appalachian Coals to incentivize generators to switch to coal.  That is not a single threshold price, but has tended to gradually occur as gas rises above $4.50 toward $5.00.  Coal prices are firm at the moment, so that threshold is not likely to come down.  

A sell-off is the most probable scenario if weather anomalies subside, because production gains in 2014 are baked in now, with infrastructure the bottleneck and large inventories of wells awaiting connection.