U.S. natural gas demand caused another 250 billion cubic feet (Bcf) of gas to be withdrawn from storage last week.
The drawdown was ahead of Global Hunter Securities LLC’s estimates of 233 Bcf.
“The new storage decline would take our end-of-season working gas storage balance to 905 Bcf, creating tight supply conditions and highly supportive of the $6 per million British thermal units (MMBtu) price rally taking place” for the week of Feb. 14, said Richard Hastings, a macro strategist at Global Hunter.
Henry Hub prices last eclipsed $6 the week of Jan. 8, 2010 and fell to $1.86 the week of April 20, 2012. Including last week, the average weekly price has been $3.76, rendering most unconventional shale gas plays uneconomical.
Dwindling supplies are likely to force many power plants to switch to coal when the electric power season begins in earnest in May and June.
Price spikes have been as high as $0.55 above $6, with some evidence that prices could spike toward $8 per MMBtu. That scenario could occur if working gas in the Midwest and Texas-Oklahoma-Arkansas-Louisiana regions see storage pulled down toward dangerously low levels, Hastings said.
Storage is down in various regions, including the West, which has dipped to 229 Bcf, Hastings said.
Gas in underground storage, Lower 48 (Bcf)
Year ago (Feb. 2013)
Source: EIA, reported Feb. 20
Although the CME Group increased margin requirements to trade natural gas on the exchange, evidence from trading suggests that excitement about the event goes beyond just speculation, because of the evidence of tight supplies, Hastings said.
Tight supplies, and the risk that Western states could consume the region's supplies of working gas, could cause supplies to dwindle closer to 100 Bcf, Hastings said. “As long as fundamentals and weather forecasts support these risks and for as long as price action continues to disgorge short positions, then the outlook for this rally remains quite strong.”
Forecasts already point to a colder-than-normal March. Further down the road, large areas in the East and Northeast could trend colder-than-normal in April, Hastings said.
The second version of the National Oceanic And Atmospheric Association’s (NOAA) Climate Forecast System, generated on Feb. 19, is predicting significantly colder-than-normal temperatures in the eastern half of the Lower 48 for March. Although the West is offsetting this with higher-than-normal temperatures, the historical benchmarks from 2003, and other major cold months during the last 30 years, convincingly indicate that major fuel consumption events may occur, even if the only geography involved is the eastern half of the Lower 48.
“This now appears to be the case with increasing confidence from an increasing variety of forecast models from NOAA,” Hastings said.