While natural gas prices normally move lower as winter ends and heating demand falls, conditions this spring appear ripe for prices to collapse more rapidly than in the spring of 2017. This may seem counter-intuitive, because storage balances are much tighter this year than at the same time last year.
In the spring of 2017, storage levels nationwide approached 2.0 Tcf, for a season-ending surplus of 265 Bcf. This after an exceptionally warm 2015-2016 winter finished with a massive 875 Bcf surplus in storage. However this year, winter demand has drawn storage levels down to 1.5 Tcf, 300 Bcf below five-year averages as of March 9.
As shown in the chart above, cold spells this past winter drove gas heating demand, resulting in rapid storage withdrawals, particularly in January. Natural gas supply has continued strong however, and spot natural gas prices exhibited only temporary upward movement, quickly shifting back to $3/MMBtu as cold temperatures passed. This marks a departure from the past relationship between gas storage and pricing levels. The chart below compares Henry Hub prices to weekly storage survey results across the past three winters.
As noted above, the unusually warm 2015-2016 winter featured high storage levels and correspondingly low natural gas prices, which fell even further during the 2016 spring. The 2016-2017 winter had moderate storage surpluses and higher prices than in 2016. But over this past winter, outside of a brief spike in prices in January, price levels have been similar to the 2016-2017 winter despite a more persistent storage deficit.
Results this past winter suggest a structural change in the availability and price of natural gas. Some analysts have suggested that gas production associated with shale regions is driving a surplus of available natural gas. This fits with an improving price picture for domestic crude oil and for natural gas liquids over the last eight months, which encourages drillers to favor these products and push natural gas into the market regardless of price.
Whatever the causes for robust natural gas supply, it will shrink the storage deficit quickly if March weather across the gas-consuming regions remains mild. A narrowing of the storage deficit into April could drop natural gas prices below $2.50/MMBtu, given the relationship between storage and price indicated by this past winter.