Somethin’ Bad About to Happen? How Warm Winters Increasingly Threaten Gas Supply/Demand Balances

We enter the natural gas winter this November after a record-breaking storage season that saw 2.75 Tcf of summer surplus squirreled away into underground storage. That surplus resulted from record breaking U.S. production exceeding lower summer demand. This year a repeat of last year’s freezing winter should run down storage enough to leave room for another summer of surplus. But with U.S. production at 70 Bcf/d and northeast output up 22 percent this year to nearly 18 Bcf/d gas supplies have reached a level where anything but a cold winter will leave too much gas in the ground next March. That theoretically would leave no room to inject surplus supplies into storage next summer – threatening the balancing role that storage plays in the natural gas market. Today we explain how the gas supply demand balance is threatened by changes to the storage market.

We are now over a week into the natural gas winter season that traditionally runs from November through March. That’s when temperatures are colder and residential and commercial heating demand in the consuming regions – primarily the Midwest and the Northeast – cranks up to annual peaks that frequently exceed the available supply of gas from production and imports. The U.S. gas market balances out seasonal demand by injecting excess summer supplies into underground storage and withdrawing that gas in winter to top up production and imports (see Catch a Hydrocarbon for more detail on underground gas storage in the U.S.). 

Battle for Henry Hub - Special Report

Examines the impact of huge surpluses of natural gas bearing down on the Henry Hub in South Louisiana from Marcellus/Utica in the east and supplies from the west sourced from high-BTU and associated gas from plays in TX, NM, OK and ND

More information about Battle for Henry Hub here.

Figure #1 below shows how this all worked out in the U.S. Lower 48 over the past year using data from Bentek’s Cell History model. The blue line is gas supply in Bcf/d, which is the total of dry gas production and imports from Canada and liquefied natural gas (LNG) terminals minus exports to Canada and Mexico. This definition excludes storage withdrawals from supply.  Note that although this supply number increased steadily throughout the year (more about that in a minute) it is a relatively level number. Total demand for natural gas on the other hand is quite volatile as you can see from the red line in Figure #1. During last winter (November 2013 to March 2014) demand was particularly volatile and soared to more than double the available supply at times – caused by the sharp polar vortex cold spells experienced in January and February 2014. During that period when demand exceeded supply, the balance was met by withdrawal from storage (purple dotted circle on the chart). As we discussed back in February of this year, the cold winter weather left storage supplies run down to historically low levels (see It’s Sure Been a Cold Cold Winter). On the right hand side of the chart you can see that supply exceeded demand from April all the way through the end of October 2014 – allowing the excess supply to be injected into storage throughout the summer - restoring depleted underground reservoirs (the green dotted circle on the chart). Although this seasonal balancing of the gas market always seems logical with hindsight, variations in temperatures, gas supply and prices make every winter different as we explained in a recent September post (see Goldilocks and the Three Winters). Developments in natural gas supply and demand this year suggest that the coming winter and next few years could see greater volatility caused by ever increasing gas supplies.

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