Storage Wars: Colder than Expected Start to March Powering End-of-Summer Price Speculation
March has come in like a Lion, pushing precipitation and temperature forecasts higher than previously reported via two separate weather events dominating the east coast from DC up the I-95 corridor. This, coupled with cold snaps in the Great Lakes region has increased the forecasted Heating Degree Days for March, resulting in further depleted natural gas storage and a slow increase in both power and gas future's markets.
As of this morning, natural gas storage now stands at a 29.5% deficit to last year and 15.6% to the 5 year average. If the end of March goes out like a lamb as predicted, storage should end the withdrawal season somewhere around 1.4 Tcf. This means 2.4 Tcf of natural gas is needed to be injected over the summer to match the five year average of end-of-season injection gas. All we need to do is produced an average of 80/bcf a day from April to November to do that. Sounds easy, right? Not so fast.
Source: EIA, HFI Research
As we saw in 2014 after the Polar Vortex, natural gas storage rebounded dramatically over the summer, pushing markets lower throughout the year until hitting 17-year lows by the following winter (this was also due to an abnormally warm 2015 winter). The chart above illustrates the current storage level and how far we need to go in order to match the 5 year average at the end of the summer. The chart below shows how much more we are already producing in 2018. The big difference between this year and 2014 is that the market has already priced in the future production, whereas in 2014 there was little certainty that production would rebound as dramatically as it did. Therefore, it is likely the market will remain range-bound ($2.50-$3.00) throughout the summer, keeping a close eye on weekly storage injections.
Source: Constellation NewEnergy
As a result of the recent cold snap and weather events, both natural gas and power markets have slowly increased . The 12 month natural gas strip gained almost 10 cents/dth with the further out strips gaining five cents and three cents respectively. Power markets have followed suit, with PJM West Hub and NYISO experiencing modest increases with ERCOT (Texas) showing a 6 dollar move/mWh since Feb. 23, a 10% move.