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Natural gas in storage -- absolutely high, relatively low [ClearOnMoney]
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Natural gas in storage -- absolutely high, relatively low

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Commentary

Natural gas in storage -- absolutely high, relatively low

16 Jan 2012 by Jim Fickett.

A reader asked if my post from Friday (Natural gas, self-correcting) was contradicted by a recent Bloomberg article (Gas Bears Up Bets on ’Catastrophic’ Surplus). The answer is no.

The Bloomberg piece focuses on the absolute level of gas in storage:

Inventories rose to an all-time high of 3.852 trillion cubic feet on Nov. 18.

Supplies may reach a seasonal record of 2.4 trillion cubic feet in March, which is when heating demand usually ends and producers begin piping more gas into storage, Cooper said. Unless production falls or cold weather bolsters demand, prices will drop to $2.40 per million Btu, and perhaps below $2, as gas overflows storage caverns and clogs pipelines, he said.

[The Bloomberg numbers are lower than the numbers I quote from the EIA because they are looking at “working gas” (what can easily be retrieved) as opposed to total gas, and because they are only looking at the lower 48 states.]

But just as the population sets a new record every month, and the size of the economy hits a new record almost every year, gas in storage very often sets a new annual record, as the economy grows. Here is a graph from the Energy Information Administration:

Although the absolute level of gas in storage is indeed high compared to past winters, this doesn't mean much. One needs to scale somehow to the current size of the whole natural gas economy. That is why I measure the gas in storage relative to concurrent gas consumption. To repeat that graph,

So the situation we have is that the gas in storage is declining relative to demand, even as the number of cubic feet grows.

Now the absolute level does also matter, because current storage facilities are of finite size. But this problem is somewhat exaggerated by the Bloomberg piece, since the record shows that when new capacity is needed, it is added. Again from the EIA:

True, there may be a short-term problem at some point. And the whole Bloomberg piece is very short-term oriented; the main excuse for the short positions trumpeted in the headline is a two-week weather forecast.

Natural gas plunged 13 percent last week on the New York Mercantile Exchange, the biggest decline since August 2009, after forecasts showed above-average temperatures through January.

My focus is the longer term and, for the longer term, things are slowly turning around. The reason gas in storage, measured in months of supply, is dropping, is that mining gas is currently a losing proposition. Most gas companies have shifted their efforts to lands rich in liquids, since $100 oil makes liquids much more profitable than gas. Encana, one company I follow, is among those making the switch:

Eric Marsh, executive vice-president at Encana Corp., (ECA-T17.38-0.51-2.85%) told an investor conference in New York last week that the Calgary-based gas giant plans to steer its multibillion-dollar capital spending program for 2012 toward oil and natural-gas-liquids drilling, and away from the “dry” gas deposits that are usually the staple of the sector. With natural gas prices mired below $3 (U.S.) per million British thermal units – the first time in a decade that gas has been this cheap in the winter heating season – and with bloated inventories and unseasonably warm weather pointing to little relief in sight, drilling for gas is a money-losing proposition.

As this switch continues, eventually the pendulum will swing back and natural gas prices will rise to where drilling is profitable.