Price spike looms for natural gas

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Price spike looms for natural gas
Price spike looms for natural gas

U.S. natural gas inventories are at low levels, raising the risk that prices could receive a jolt this winter if a cold snap hits.

The U.S. natural gas market is cyclical. Demand spikes in the winter as people and businesses turn up the heat, but consumption dips in spring and fall because of mild temperatures. That means that between November and March, gas inventories are drawn down, only to be replenished between April and October.

The peaks and valleys of this market fluctuate from year to year, but generally they follow a predictable pattern.

 

 

However, at the same time, U.S. natural gas demand is rising on a structural basis, as coal plants shut down and more gas-fired generation comes online. Plus, gas exports in the form of LNG are steadily on the rise.

This means that while demand continues to follow a cyclical pattern, both the peaks and the valleys of this pattern are rising steadily over time.

The structural increase in gas demand has not been much of a problem because gas production has climbed as well. The surge in gas output over the past decade has largely been driven by the explosion of production from the Marcellus shale.

Still, there are reasons to think that the market is not as flush as it might seem. Last winter, temperatures dropped to unusually low levels, and a deep freeze across much of the country led to record-breaking days of gas consumption. For instance, on January 1, 2018, the U.S. consumed a record amount of gas in a single day.

While certain regions saw spikes in prices, such as the northeast, by and large the price increases were only temporary and only due to fears of near-term shortages. Few expected prices to change all that much because of the cold snap.

Whenever this occurs, natural gas production over the course of the spring and summer months – often referred to as “injection season” – tends to replenish depleted inventories.

The difference this time is that we entered the injection season with already diminished storage levels, and over the past few months gas inventories have increased less than expected.

Source: Oilprice

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