Does a Record 4 Trillion Cubic Feet in Storage Justify Today’s Low Prices?

My reports focus on Natural Gas rates because it is now the largest source of energy for the generation of Electricity in many regions; therefore, Natural Gas and Electricity rates are highly correlated.

In my Nov 3rd report, I said the recent collapse in Natural Gas was an excellent opportunity to enter new hedges and extend hedges already in place. I believe the bearish factors discussed in my report are already factored in the price of Natural Gas, and today’s low pricing will be short lived and will usher in much higher pricing in the years to come.

Today, in this week’s storage report, the U.S. Energy Information Administration (EIA) announced supplies increased 15 Bcf; therefore, we are entering the winter heating season with a record 4 Tcf in storage.

The question is does a record 4 Tcf in storage at the start of the winter heating season justify today’s low price of Natural Gas, and a does a record amount in storage insure Natural Gas prices will remain low this winter?

I refer to the 4-year chart of Natural Gas below to answer both questions:

As you can see in the above chart, the previous record Natural Gas was 3.929 Tcf was reached at the start of the winter heating season in Nov 2012.

Natural Gas was trading near $4.00 per MMbtu at that time, which is much higher than today’s price near $2.26 per MMbtu with supplies at 4 Tcf. Does the relatively slight 1.8% increase above the previous record of 3.929 Tcf high justify such a huge difference in price? I do not believe it does.

To put into perspective why I say this you need to reflect on the last time Natural Gas prices plunged to near present levels in the spring of 2012. After experiencing the warmest winter in 100 years much less Natural Gas was used than normal and we were left with the largest storage surplus in history with 2.479 Tcf in storage at the end of the winter heating season, which was 57% higher than the previous year. This was an unprecedented surplus in supplies and it was not surprising Natural Gas tested a 15-year low at that time.

But today’s storage level of 4 Tcf is a relatively slight increase of 1.8 % above the previous storage record of 3.929 Tcf and does not justify today’s price near $2.26 per MMbtu

Now regarding the second part of my question does a record amount in storage insure Natural Gas prices will remain low this winter?

I absolutely do not believe it does, and in fact I believe Natural Gas rates will likely increase substantially from present levels this winter

As you can see in the chart below, after reaching the 15-year low in April 2012, Natural Gas rallied although new fracking technology increased production to an unprecedented pace leading to the record level of storage in Nov 2012:

Some may argue the El Nino we are presently experiencing will lead to a warm winter and prices will remain low, but as I pointed out in my Nov 3^rd report, all El Ninos are not the same. In the winter of 1972/73 we experienced a strong El Nino, but burned much more Natural Gas than normal. El Ninos are characterized by severe extremes in regions and it is impossible to know with certainty the net effect on demand for Natural Gas this winter.

But even if we experience a warmer than normal winter prices will likely still rise from present levels for no other reason than prices are just too low! Remember, Natural Gas rallied off the spring 2012 low even though the fundamentals were terrible. Why? Prices were just too cheap!

Below is a chart from my Nov 3^rd report. Please look at this chart and ask yourself the question below the chart:

Given that 99% of the time Natural Gas has been higher than $2.00 per MMbtu; is it wise to fix your cost of Natural Gas and Electricity near a 15-year low?

I believe the answer to this question is absolutely yes!  

Not every client’s risk tolerance and hedging strategy is the same, but we trust the above report will help you put into perspective the risk/reward opportunities at this time. I invite you to call one of our energy analysts to help you plan a hedging strategy appropriate for your situation.

Ray Franklin
Senior Commodity Analyst
727-400-3170