US natural gas inventories decreased by 338 Bcf for the week ending February 19, compared with the five-year (2016–2020) average net withdrawal of 122 Bcf. Working gas stocks total 1,943 Bcf, which are 161 Bcf lower than the five-year average and 298 Bcf lower than last year at this time. Analysts’ expectations had been for a withdrawal of 328 Bcf. The weekly withdrawal was the second-largest withdrawal ever recorded by the EIA. The largest came for the week ending 1/5/18 when 359 BCF was reported. The ONLY reason that this week’s report did not shatter the all-time high was due to the lost natural gas generation in ERCOT that was forced off-line in the wake of the unprecedented well freeze offs and Texas Governor Abbott mandating the halt of natural gas supplies being sold or transported outside the state of Texas.
The South-Central storage region alone accounted for a record high withdrawal of 156 BCF as part of this week’s report. Thankfully, the cold was largely isolated to the midcontinent and Texas regions. Had the cold spread to the heavily populated East, who knows how large the weekly storage withdrawal might have been? Current storage inventories now site below BOTH year-ago and the previous five-year average. The fact winter is not even over yet and with (at a minimum) five reporting weeks still to go, the probability of storage inventories exiting the withdrawal season and entering the injection season at or around 1,600 BCF is very likely. Historically speaking, ending at this level would not be a big deal in terms of refilling gas storage for the next winter heating season. But, the gas market today is a very different one than what we’ve seen over the last five years. The sheer growth in daily gas demand seen from a combination of LNG exports, pipeline exports to Mexico and power generation coupled with domestic production levels that are still LOWER than year-ago levels puts reaching a “safe” level of gas storage by next heating season in jeopardy.
A sub-optimal storage level for heating season 2021/2022 could have a “domino” effect on inventory levels for injection season 2022 and heating season 2022/2023. The NYMEX natural gas forward curve has yet to price out this potential scenario. This explains why longer-dated NYMEX pricing in 2022, 2023 and 2024 remains heavily discounted to 2021 pricing. Perhaps these price curves are anticipating a sharp up-tick in drilling and both an increase from traditional and associated gas production will occur?
However, large shale producers continue to “bend the knee” to Wall Street’s demands for positive free cash flow and tight drilling budget management. The days of overproducing freely look to be over.
End users with exposure to natural gas prices for the next few years need to practice diligent and prudent risk management. With exceptional value currently seen in the deferred years, end-users need to be FORWARD thinking to manage their long-term risk exposure to the natural gas market.
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