January natgas futures closed at $3.112/MMbtu yesterday with no signs of strength in the market. Production remains strong while the weather outlook is above normal through much of the high demand market area. Freeze-offs have been minimal.
Weak winter prices can have important implications for natural gas storage. The average Henry Hub price during the storage injection season this year (April-October) was $4.14. Since November 1, the average price has been $3.20, or $0.95 below the injection number. (Net withdrawals did not actually begin until the end of November, but the numbers come out about the same.) The implication is that storage gas is almost a buck more expensive than spot gas. Or said another way, gas withdrawn from storage and sold into the spot market will show a $1/MMbtu loss. There is no help for storage volumes from the futures market. The CME/Nymex forward curve does not get back above $4.14 until November 2013.
Of course, local distribution companies hold most storage gas, and they are usually insulated from inventory losses by the fuel cost adjustment clauses in their contracts. Non-utility, merchant storage volumes are often hedged and thus offset inventory losses with futures gains. Nevertheless, upside-down winter prices will motivate some to hold volumes in storage through the end of the withdrawal season.
There are a few implications. First, this is one more reason why storage balances could continue to move above historical highs, likely entering the 2012 injection season with more than 2 TCF remaining in storage – a very bearish development. Second, a storage overhang will mean that a flood of volumes will crush any upward blip in price. Third, the intrinsic value of natural gas storage (the summer versus winter price spread) will be flat for a long, long time.
