The U.S. natural gas market ended the winter withdrawal season with inventories carrying a record high overhang and an enormous surplus versus previous years. Since then, the historic surplus has begun to contract, and the CME/NYMEX Henry Hub futures contract has responded, rallying 11.2 cents since April 1st to settle at $2.068/MMBtu Thursday. Now, well into the third week of injection season, the big questions are whether the recent bullishness can be sustained and what it will take to relieve the surplus in storage. In today’s blog, we assess how the existing surplus will impact summer storage activity and prices.
This is Part 2 in our “Carry That Weight” supply/demand update series. In Part 1, we recapped the winter withdrawal season, in which mild weather suppressed demand even as production set new record highs, resulting in oversupply and some of the lowest daily futures settlement prices in 17 years. U.S. natural gas storage inventories ended the winter heating season at a record high of 2,480 Bcf as of April 1, 2016, which translated to a 1,004-Bcf surplus to the corresponding week in 2015. Daily futures prices this winter averaged just $2.05, $1.175 (36%) lower than last winter.
As we noted in Part 1, storage inventory levels at the end of the winter season typically set the tone for storage activity and prices through the injection season, which runs from April 1 through October 31. Natural gas storage has a seasonal pattern as regular as clockwork, driven largely by fluctuations in weather. In the winter, daily gas demand is historically higher than daily production, resulting in withdrawals from storage – spurred by contractual obligations of storage capacity holders and higher winter prices that entice gas out of storage to help meet heating demand.