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What Are the Lingering Impacts on Natural Gas Prices Post Polar Vortex?

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The winter events of 2013-14 will not soon be forgotten by those involved with the U.S. natural gas market. One may be asking, “What are the lingering impacts on natural gas prices post the 2014 Polar Vortex?” The answer depends on the time horizon related to your energy budget decisions.

36-Month Outlook: The First 12 Months

NYMEX natural gas commodity futures prices for a three-year period (April 2014 – March 2017) as of March 25, 2014, and as of a year earlier on March 25, 2013, reflect two different views of the 36-month contracts.

The first 12 months, i.e., April 2014 through March 2015, were, as of March 25, higher than they were one year ago. This reflects the lingering impacts on natural gas prices post Polar Vortex.

Many factors impact commodity prices during the summer season, including weather and storage injection demand. And while there may be period price declines that allow commodity customers the ability to lock in favorable prices, the outlook for the April-October gas storage injection season is not favorable from a price perspective.

Gas Storage Injection

Demand surged to record highs during this past winter as per data from a leading industry source – Bentek Energy. This led to the lowest gas storage levels since 2003 and a record seasonal storage deficit.

Because of this, the volume of natural gas that could be injected into U.S. storage facilities during the April-October injection season is nearly two times greater year-over-year than the current U.S. gas production surplus.

Gas utilities that are charged with making sure that “human needs” are met during high winter demand periods control a majority of U.S. storage capacity. Additionally, these entities recover most or all of the commodity costs associated with serving their customers. The implication of both of these factors is that beginning in April, utilities will begin to inject large, possibly record, volumes of natural gas into storage facilities in order to have sufficient supplies before the 2014-15 winter. The injections will occur regardless of price, due to guaranteed cost recovery by the utilities, and they will absorb excess supplies in lower demand periods and will compete with demand in higher demand periods. Natural gas market participants are well aware of this substantial injection demand and this is a key reason, post the 2013-14 winter period, that NYMEX natural gas prices are higher year-over-year.

The NYMEX natural gas November 2014 – March 2015 price strip is also higher year-over-year. There are two critical uncertainties that are behind the winter price support.

  1. Can the utility sector inject enough gas into the ground to meet forecasted space heating demand before the 2014-15 winter starts?
  2. What is the “risk” related to weather-driven demand (i.e. will temperatures be below normal)?

What are possible factors that could lead to summer 2014 and winter 2014-15 natural gas commodity prices declining?

A surge in U.S. gas production beyond expectations and lower summer weather gas demand year-over-year are the primary bearish factors that could significantly impact gas prices (i.e. commodity and basis).  But betting on mild weather is risky, as many of us have learned after the last few months.

Finally, There Is Some Good News

NYMEX natural gas prices were lower year-over-year as of March 25, 2014 for the April 2015 through March 2017 time period (months 13-36).  Additionally, no NYMEX contract price was above the $4.50 level. Prior to January 2014, the NYMEX spot contract price had remained below this level since July 2011. This was due primarily to a massive surge in U.S. shale gas production combined with lower winter weather-driven demand.

Amazingly, NYMEX market participants, particularly sellers, appear to believe that the combination of expanded natural gas infrastructure and contemporaneous production will offset organic, greenfield, and weather-driven demand for those periods relative to the same vantage point in March 2013.  And don’t ignore bullish risks from LNG exports and coal plant retirements.

In Summary

As of March 25, 2014, the NYMEX April 2014 – March 2015 strip was higher year-over-year and the April 2015 – March 2017 strip was lower.

Questions that one may ask include:

  • What is the probability of price declines in the upcoming summer/winter strips?
  • Are current natural gas prices value?

We at Direct Energy are asking the same questions, and we will continue to keep you informed in future reports.

Posted: March 28, 2014