Natural Gas Mythology Faces Stiffest Test Yet

Note: This post continues our look at the U.S. natural gas market picture, which was turned upside-down by the coldest winter in a generation. It is my thesis that the “natural gas miracle” story leaves us unprepared for the day when inescapable geological and financial realities collide. –Michael Vickerman

The natural gas injection season has begun. Last week, EIA reported a net build of 4 billion cubic feet (bcf) in storage, raising inventories from 822 bcf to 826 bcf. One would have to go back to early 2003 to find stored natural gas levels this low.

Since the heating season began last November, a record-setting three trillion cubic feet (tcf) of natural gas was pulled out of storage to keep this country from freezing over during the 2013-2014 winter. That total is almost 50% larger than the 2012-2013 drawdown, which reflected a statistically average heating season.

The question arises: can injections of natural gas between now and early November bring storage volumes back to recent norms without a significant price increase? That is the question posed by Jim Hansen in his April 11, 2014, edition of Ravenna Capital Management’s Master Resource Report. While Jim’s newsletter is always worth reading, this issue in particular stands out in its comprehensive look at the dynamics affecting natural gas supplies for the remainder of this year. The opening paragraph sets up the discussion perfectly:

“Will shale gas be able ride to the rescue of natural gas storage by next fall and keep natural gas both cheap and abundant? The market for the last few weeks appears to be saying that supply will ride over the hill just in time to save the day. This week’s report looks at how likely it is the shale gas cavalry will show up and save the day.”

Jim’s superb discussion of this complex and evolving story leaves little room for embellishment or clarification. It’s worth pointing out, however, that we have already gone through three months of increased natural gas output this year, as projected by U.S. Energy Information Administration (EIA), yet still we find ourselves looking out of a three tcf hole. Marketed output this January exceeded last year’s totals by 4%. As impressive as that increase sounds, it was more than offset by the drawdown in supply that month. Ditto February and March. Whatever increase in output that occurred in those two months was wiped away completely by the record cold.

EIA predicts that storage levels will rebound by 2.6 tcf this year, leaving us with 3.4 tcf for the next heating season. Never before have energy companies managed to inject such a large volume of gas into storage in such a short period of time. Yet Wall Street’s reaction in facing up to this herculean task remains decidedly ho-hum. Traders are content to coast along with prices averaging 4.50/MMBtu. This is the sort of complacency that invites skeptics like myself to think about the all the unsinkable ships in history now in permanent residence on the ocean bottom.

Five Reasons Solar’s Win Over Gas in Minnesota is Just the Beginning

Five Reasons Solar’s Win Over Gas in Minnesota is Just the Beginning | Institute for Local Self-Reliance

John Farrell | Feb 28, 2014

Solar advocates were popping corks when a New Year’s Eve ruling by an administrative law judge in Minnesota said that distributed solar arrays were a more cost-effective resource than natural gas to meet Xcel Energy’s peak power needs. The energy media were aflutter for weeks, but many missed the bigger significance.

If solar trumps gas for peaking power in Minnesota, there’s little reason to be building new natural gas peaking capacity anywhere in the country.  Ever again.

Let’s look at the 5 reasons why solar’s triumph over natural gas is likely to stick…


Still More on the Game-Changer Narrative

Note: This update follows my commentary posted two weeks ago documenting emerging changes in the U.S. natural gas market picture.  It is my thesis that the current understanding of supply and demand trends leaves us unprepared for nonlinear events like this winter’s weather.  
–Michael Vickerman

There is nothing quite like a long stretch of below-normal temperatures to stoke the heating fuel markets. Last week (February 13) the Energy Information Agency reported a withdrawal of 237 billion cubic feet (bcf) from inventories, a 12% decline from the previous week’s level.  As indicated in the table below, inventories have shrunk to 1,686 bcf.

It’s a safe bet that this week’s withdrawal number will be even larger than last week’s total, which would send storage volumes below 1,500 bcf. It’s worth remembering that there is at least six weeks left in the current heating season. For comparison purposes, the previous heating season ended in the second week of April with inventories down to 1,673 bcf. This has already been a winter to remember, and it’s not over by a long shot.

It is finally dawning on traders that supplies are the tightest they’ve been since the 2003-2004 winter. Prices have now breached the $5.00/MMBtu mark and may climb some more. However, it will take more than a brief foray into $5.00+ territory to sustain extraction activity at a level that can fully replenish inventories in time for the next heating season. And, as noted in my original commentary, current prices are still low relative to 2007-2008 levels, and are unlikely to induce significant reductions in demand.

As reported in the February 14, 2014, edition of Ravenna Capital Management’s  The Master Resource Report, Conoco Phillips has no immediate plans to jump-start exploration and extraction activity based on recent market conditions.

ConocoPhillips wants benchmark natural gas prices to remain over $5 for as long as two years before the company boosts spending on natural gas, Chief Financial Officer Jeff Sheets said in a Jan. 30 interview.

“We won’t be leaders in getting out there and drilling natural gas,” he said.

I strongly encourage readers of this blog to check in weekly with The Master Resource Report, an educational newsletter written by Jim Hansen of KMS Financial Services. Jim is a keen observer of energy markets and has been tracking the emerging disconnects in the domestic natural gas market since the summer of 2013. 

I’ll send out another update in a week. In the meantime, let’s celebrate today’s foretaste of spring weather, while Mother Nature slaves away on the next winter storm rolling our way.

Heating Season
Start Volume
(in bcf)
Remaining volume after 6th
week of year

More on the Game-Changer Narrative

Note: This update follows my commentary posted last week documenting emerging changes in the U.S. natural gas market picture and discussing whether the altered picture will occasion additional repricing upward to balance supply with expected demand increases.
–Michael Vickerman

On February 6th, EIA reported that natural gas storage volumes were 270 billion cubic feet (bcf) under last week’s withdrawal numbers.  That number reflects data submitted to EIA on January 31st.

Going into February this year, the quantity of natural gas in storage (1.923 bcf) is half of what it was at the start of the current heating season (3,834 bcf). The heating season generally ends around April 1.
I expect the next EIA report (February 13) to easily surpass the 200 bcf threshold.

In the previous 10 years, the largest amount of gas withdrawn from inventories during the entire heating season was 2,311 bcf. That occurred during the winter of 2007-2008. Thus far this season, a total of 1,911 bcf has been taken out of storage. If the next two reported withdrawals (Feb. 13th and 20th) exceed a combined total of 400 bcf, this winter’s withdrawals will exceed that total, and that will happen before the end of February.

Though this is shaping up to be the coldest winter in 20 years, the price of natural gas still remains below $5.00. How many more weeks of below-average temperatures will it take to move the floor price of natural gas to $5.00 and higher? The game-changer narrative is still hanging tough.

Over the weekend, I checked Chicago and Madison weather forecasts for the week of February 10th. To the extent there is a warm-up in sight, it will happen Thursday and Friday. This respite will bring temperatures back to seasonal levels, but don’t expect it to last. The weather forecast in Madison for the Valentine’s Day/President Day weekend heralds a return to below-normal temperatures.

The cold weather is also taking a bite out of current extraction volumes, as evidenced in the highlighted passage of the Bloomberg News article below. While pace of extraction will definitely pick up as winter gives way to spring, the question going forward is whether supply can increase by a record-setting 2.7 trillion tcf between the end of the current heating season and the beginning of the next. We’re starting to enter uncharted territory.

Biomass Energy Can Blunt Future Propane Price Spikes

Biomass fuel as pellets or cord wood can assist more than 250,000 propane customers in Wisconsin, reducing the impact of propane supply shortages and price spikes. Propane users predominantly live in rural areas not served by natural gas. These are the same areas where wood and other biomass products are available in large quantity in Wisconsin. RENEW Wisconsin and the Heating the Midwest organization both advocate for increased usage of this local, renewable fuel to reduce dependence on imported propane.

Click here for the RENEW’s full Biomass Press Release