After entering the winter withdrawal season above 4,000 Bcf for the first time in history, natural gas in storage set a new record. Now, it is setting another record, exiting the peak demand period at around 2,500 Bcf. This is about 69% above the same time last year and 51% above the five-year average.
For the week ending March 18th, the Energy Information Administration (EIA) reported the first injection of natural gas into storage of the year. Traditionally, gas producers inject gas into storage facilities from April through October to meet the peak demand period where gas is withdrawn from November to March. Even without the early build, stockpiles are much higher this year compared to previous years due to a warmer-than-normal winter brought on by El Niño. Winter heating demand averaged about 14% below normal, while producers continued to drill at a near record pace. The supply glut created by lack of demand and steady production drove natural gas prices to their lowest level in
So where does the industry go from here? One of two things is likely to happen due to the current price levels and available underground storage space. The first scenario has natural gas producers slowing the pace of production, either on a voluntary or involuntary basis. Even though the cost of drilling has decreased, many producers cannot sustain a profit at today’s prices and will likely idle certain wells, cut-off further investment, or even face bankruptcies. In either case, production would slow, the supply and demand balance would begin to normalize, and prices would gradually rise. In the second scenario, production doesn’t taper off and the available underground storage capacity becomes a major concern. Over the last five years, the industry has added around 2,300 Bcf of gas into storage. However, this year, only about 1,800 Bcf of the total 4,300 Bcf maximum capacity is available. If the pace of production remains steady and significant summer cooling demand doesn’t materialize, there will be no place to store the natural gas and prices would plummet to a level that would force production cuts. In the second scenario, price levels remain depressed throughout the year.
Whichever scenario plays out in the end, energy consumers are benefiting now from low prices. Natural gas is currently trading around its lowest point since 2002. Additionally, since natural gas has become a major source of electric generation, wholesale electric rates have also dramatically dropped.
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