Natural Gas Withdrawal Symptoms – Price Recovery and the Winter Season

Front month NYMEX natural gas prices reached a twelve-month high of $3.76/MMBtu this past Wednesday - falling back to $3.70/MMBtu yesterday. NYMEX prices have been on a rising trend ever since they dipped under $2/MMBtu back in April of this year but can they sustain that momentum?  The most important factor in answering that question over the next 4 months will be the weather. More specifically, will there be a winter this year and how much gas is withdrawn from storage as a result of the cold weather. Yesterday the EIA announced the first natural gas storage withdrawal of this winter.  Today we examine the start of the storage withdrawal season.

In this second week of November we are right at the start of what is normally considered the storage withdrawal season. That’s when lower temperatures cause demand for natural gas to exceed supply and gas distribution companies make withdrawals from storage to top up their deliveries. Yesterday’s EIA data for November 9, 2012 showed the first storage withdrawal of the season – 18 Bcf . When total US natural gas demand for power generation, industrial, residential and commercial use as well as exports to Mexico exceeds production and imports from Canada and LNG terminals on a daily basis that implies the need to withdraw gas from storage to balance supplies. There is likely to be a short period when the supply /demand balance changes back and forth as we swing from storage withdrawal to injection and back again, but if winter is really here then we can expect withdrawals from now on.

Aside from natural gas storage withdrawals, there is another way to tell when the natural gas winter season is upon us and that is by looking at temperature. When temperatures fall below 65 degrees Fahrenheit then demand for natural gas for heating increases.  We can get a good idea of the big picture nationally on how winter temperatures impact demand for natural gas by looking at heating degree day (HDD) data published by the National Oceanographic and Atmospheric Administration (NOAA). Back in June of this year we looked at cooling degree day (CDD) data (see Under the Weather) and walked though an example of how you calculate CDDs. Recall that CDDs occur when temperatures for a particular region climb above 65 degrees Fahrenheit. HDDs are the opposite – when temperatures fall below 65 degrees Fahrenheit indicating that consumers will use heating. The data that NOAA publishes for degree days is available “population weighted” meaning that they weight the degree day totals based on where people actually live and are likely to be using heating (or cooling). [You can learn more about NOAA’s population weighting at their website here].  When looking at US national HDD data we should note that not everyone uses natural gas for heating. Some heating uses electric power and a portion of that comes from natural gas power generation, but there are also consumers using propane and heating oil to heat their homes. For our purposes we are not so concerned by heating fuel breakdown because we are just trying to understand the national temperature picture.

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