The U.S. Energy Information Administration reported last week that natural gas in storage increased by 29 Bcf. There was an injection for the same week last year of 42 Bcf while the five-year average injection is 40 Bcf. Total U.S. natural gas in storage stood at 2,851 Bcf last week, 16.5% less than last year and 6.2% lower than the five-year average for this time of year.
Natural gas markets, and in turn power markets that are driven in large part by gas, were pushed higher at the end of last week due to a an EIA storage report that came in under forecast and Hurricane Ida bearing down on the Southeast US.
The NYMEX forward strip for the coming winter period, November 2021 through March 2022, jumped $0.39/Dth from Wednesday to Friday of last week, settling at an average of $4.43/Dth across the 5-month period. The jump represents a 9.7% increase from Wednesday’s mark.
NYMEX forwards for subsequent months were also impacted, but to a lesser degree than pricing for this coming winter. The forward strip for 2022 increased $0.18/Dth during the same time, settling at $3.70/Dth, an increase of 5.2%.
The upward pressure from those immediate factors has seemed to subside, with markets at the beginning of this week staying flat or slightly down from Friday’s high mark.
Hurricane Ida hit Louisiana this weekend as a Category 4 hurricane with 150 MPH winds, leaving more than 1 million customers without power in Louisiana and Mississippi. Now a tropical depression, the storm has weakened and is moving elsewhere in the Continental US.
Local utility company Entergy stated that all eight of its transmissions lines that deliver power to New Orleans were taken out of service, leaving the entirety of the city without service. Across the state, power lines are downed, substations taken out of service, and transmission lines interrupted, all due to the destructive winds and flooding brought on by the storm. Entergy, who serves the majority of the 1 million plus customers without power, is still assessing the full scope of damage and is already in the midst of a staggering repair effort with no completion date given.
Ahead of the storm, oil & gas producers in the Gulf region shut in the majority of their production to protect personnel and assets from the impact of the storm. As of Aug 30th, approximately 93.5% of the Gulf regions natural gas production was shut down. It was this anticipated drop in production that signaled the market to rise, as well as the potential for long term damage to oil & natural gas infrastructure.
Oil & gas producers are still assessing the state of their production infrastructure, looking for any damage that may have occurred to production rigs and transportation infrastructure. At a very basic level, it seems no catastrophic, newsworthy damage has occurred, unlike the events that followed Hurricane Harvey, in which significant refinery infrastructure was destroyed. More information is due to be released this week, while Platts Analytics states that it typically takes 10 days to return to pre-storm production levels.
The price volatility represents a continued theme in national energy markets in recent months – as forward pricing has risen over the summer to points that have not been seen in years. It has been a sheer departure from pricing seen at the beginning of the year and in 2020, when prices were near historical lows across national markets.
As discussed in prior SourceOne updates, other compounding factors have contributed to the rising market. This summer has seen high levels of domestic demand for natural gas, induced by unrelenting hot weather and cooling demand. Natural gas exports, both LNG and pipeline gas to Mexico, have also risen, as economies outside of the US continue to recover from the pandemic. These demand factors are underlain by production that has remained relatively flat in the past year, since dipping significantly in the middle half of 2020.
In other words, last week’s storage report and anticipated market impacts from Ida are simply new factors in an already tightening market. The next two months of injections will be a determining factor in how the market moves ahead of the winter months, as will forecasting for the winter itself. If early forecasts project this winter to be colder than average, the rise in pricing seen recently will be validated and further upward pressure may be applied.
During the winter, if widespread early cold spells do occur, we could see very high gas pricing due the tight supply & demand factors already in place. Conversely, if the coming winter proves to be mild and heating demand is weak, we may end up seeing gas prices that crater late in the year.
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