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Over the past three weeks, we have seen considerable contraction in the storage deficit due to repeatedly low levels of withdrawals from underground storage. In fact, the average rate of net withdrawals from storage is a whopping 31% lower than the five-year average so far in the withdrawal season (there are, however, 9 weeks remaining). During that same timeframe (that is, the past three weeks), the price of natural gas has remained as volatile as ever, as drastic price variances have piggy-backed sudden and extreme shifts in the short-term weather outlooks. Following a very warm first few weeks of January, we saw the prompt month settle move down from the $3.50-$3.60 levels witnessed in late December, to $2.90. Again, the subdued heating demand and accompanying paltry withdrawal figures have kept prices depressed at or around the $3 mark, until last week when a severe cold due to the polar vortex approached and a major snowstorm settled in across the Midwest and Northeast. In a predictable corresponding move, the February natural gas contract ballooned to above the $3.50 level. As of now, the market outlook is especially bullish for natural gas prices that are already bolstered by historically low inventories and are even more sensitive to such extreme shifts in weather. The natural gas storage deficit to the 5-year average is expected to decline back to 600+ Bcf by the start of February, thanks to a much more bullish second-half January outlook. Heating demand is expected to increase to the highest level this winter and the colder-than-normal weather looks to last into February.

February should prove to be a crucial month for the future of natural gas prices in 2019 – let’s consider the potential impact of what the current one-month outlook calls for, below-average temperatures for just about everything east of the Rockies. While the relative accuracy of that projection remains to be seen, the associated upside price risk is all but certain should it be realized. As it stands, the bearish first half of January will likely keep February and March contracts from ever hitting the $5 mark (barring an extended cold carrying into March), but a move above $3.75 and potentially $4 is still well within reach. We would need to see average withdrawals over 150 bcf for the next few weeks to see stocks fall below 1,000 bcf, which is unlikely, but a frigid February could be the impetus for such an event. No matter what happens, the increasing demand from LNG as the export market in the US expanding is likely to put a strain on future injections as we witnessed last year. Those lower level of injections led the natural gas market into the peak season in 2018/2019 with the lowest level of stocks in years, and that trend could continue in 2019 despite record production from the Marcellus and Utica shale regions of the United States. What the natural storage starting point looks like come mid-March will largely be determined over the next five weeks.

 

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