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Analysis: Midwest utilities hoard storage, despite cold, demand

Highlights

Withdrawal rate at 2.1 Bcf/d falls 700 MMcf/d short of average

Population-weighted temperatures register 8 degrees below normal

Denver — Risk-averse storage holders in the US Midwest appear to be hoarding their inventory so far this withdrawal season, despite cold weather, strong gas demand and historically high prices.

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Over the past three weeks, withdrawals in the region have averaged 2.1 Bcf/d, which compares to a five-year average withdrawal rate over the same period at 2.8 Bcf/d, S&P Global Platts Analytics data shows.

This year, though, early winter weather across the Midwest has been colder than usual. Over the past 30 days, population-weighted temperatures have averaged about 8 degrees Fahrenheit below normal. As a result, gas demand led by the residential-commercial sector has been stronger, too. In the past month, total demand averaging 17.8 Bcf/d has outpaced the prior five-year average by 3.1 Bcf/d, or about 21%.

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If elevated demand weren't enough to incentivize more hefty draws on storage this season, consider that the recent rally in the cash market has lifted gas prices at Chicago and other Midwest hubs by nearly $1/MMBtu over the past month, S&P Global Platts data shows.

Despite mounting incentives to drawdown stocks, it appears that end users and utilities are hoarding their inventory as they hedge against this winter's coldest, highest demand gas days that lie ahead.

CONSERVATIVE STRATEGY

A recent and preliminary analysis of this year's storage activity shows that many inventory holders are sticking to a conservative strategy this year, according to Platts Analytics. Through late November, that strategy was particularly notable in the South Central and Midwest regions.

Given this season's record-low storage levels, the supply risk posed by abnormally cold weather is outsized compared with previous winters.

Last January, a series of snow and ice storms lifted Midwest gas demand to multi-year highs in the upper 29 Bcf/d range, and briefly to almost 32 Bcf/d -- the fourth highest on record.

During those events, single-day draws on storage approached and even topped 15 Bcf, severely drawing down available inventory to manage cold weather that came much later in the season and even into April.

PRICE VOLATILITY

Through Thursday, Platts Analytics estimates Midwest gas in storage at 796 Bcf, which is roughly 125 Bcf below the prior five-year average. While that deficit has narrowed in recent weeks, down from more than 150 Bcf, recent and modest withdrawal activity should continue to narrow the gap heading into January.

But, as end-users, utilities and other storage holders opt to balance their winter supply through spot-market procurement, those purchases are likely to drive increased volatility, and higher cash prices.

In recent trading, storage-related buying has likely been behind the increase in volatility at Chicago's cash market.

Over the past three weeks, the absolute daily price at Chicago city-gates has averaged 16 cents/MMBtu. That compares to an average 10.5 cent/MMBtu daily change during the three weeks prior, S&P Global Platts data shows.

-- J. Robinson, jrobinson@spglobal.com

-- Richard Frey, richard.frey@spglobal.com

-- Edited by Joe Fisher, newsdesk@spglobal.com