What remains of the official natural gas inventory withdrawal season could be limited by the possible net injection into natural gas stocks for the week of March 8. Amid already swollen natural gas supplies, an early injection, although not unprecedented, could send natural gas prices reeling.
In its upcoming storage report, the U.S. Energy Information Administration (EIA) is expected to outline a potential build to stocks. Outlooks from Reuters portend from a 16 Bcf withdrawal to a 6 Bcf injection. NGI has modeled a 3 Bcf pull, which compares with a draw of 58 Bcf for the same time last year and a five-year average draw of 88 Bcf.
“If the storage build pans out in [Thursday’s] report, it would be the first natural gas storage build of the year, and the first time natural gas has posted a build the second report of March since 2012,” said Mizuho Americas’ futures division director Robert Yawger.
“Natural gas will likely post an even larger storage build in next week’s report, the first storage build in the third week of March since 2016,” Yawger said.
While the official start of the injection season is April 1, early storage injections are not unprecedented, but are relatively rare.
Over the last decade, Lower 48 storage flows have flipped to injections before March 31 twice – in 2019 and 2021 – and also showed a very early start in 2010 and 2012, Criterion Research LLC Vice President James Bevan said.
On a regional basis, the East and Midwest almost always follow the traditional flip to injections after March 31. “The single exception was in 2012 when they started to inject the week of March 23,” Bevan said.
In the South, Bevan said early starts happen far more often than not. “Salt injections routinely begin before March 31, with many instances of net injections kicking off in February.”
“South Central nonsalt flows have flipped over to net injections before March 31 in all but three of the past 10 years,” Bevan said. That included in 2020 and 2021, when continuous injections into storage started as early as the first half of March.
Storage Capacity Woes
But this year, after a winter that wasn’t, alarms have sounded of natural gas supply that could build to near 4 Tcf by the end of the injection season and exceed the limits of current storage capacity.
EIA said working natural gas inventories have reached 69% of their working gas capacity thus far during the refill season, which runs from November to March.
Compared to the five-year average, Lower 48 natural gas storage was 31% higher after EIA reported a 40 Bcf withdrawal from stocks for the week of March 1, bringing the total working gas supply to 2,334 Bcf.
Every region of the country reported a storage surplus compared with the prior five-year period, with South Central inventories 34% above the average of the five previous years, the Pacific region in excess by 43% and the Mountain region ahead by a whopping 78%. The Midwest region was 28% higher compared with the five-year average, and the East was 11.9% above the five-year average.
EIA said the average rate of draws from storage thus far this withdrawal season was 20% lower than the five-year average.
“If the rate of withdrawals from storage matched the five-year average of 5.0 Bcf/d for the remainder of the withdrawal season, the total inventory would be 2,184 Bcf on March 31, which is 551 Bcf higher than the five-year average of 1,633 Bcf for that time of year,” EIA said.
Comparatively, working natural gas in storage in the Lower 48 ended the 2022-2023 natural gas withdrawal season at 1,401 Bcf. By the end of the 2023 injection season, stocks had risen to 3,776 Bcf.
Price Risk
NGI daily historical data show that with natural gas storage facilities brimming with supply during the 2022-2023 withdrawal season, the Henry Hub spot price moved from an average high of $7.295/MMBtu to as low as $1.925. In the injection season from April to October, the range sank from a $3.300 average high to a $1.720 low.
EBW Analytics senior analyst Eli Rubin said this year’s bulging regional storage surpluses are contributing to steep Henry Hub market discounts to the New York Mercantile Exchange (Nymex) front-month futures contract.
Henry Hub spot natural gas averaged $1.515 on March 12, falling 2.0 cents day/day, according to NGI data. The April Nymex contract, meanwhile, settled at $1.759, down 4.6 cents on the day.
In addition to price risk, Price Futures Group senior analyst Phil Flynn told NGI that a possible injection into supply early in the season could be “psychologically devastating,” particularly for small producers.
Producers Respond
“It’s just a reminder about how bad the demand has been for them this year,” Flynn said.
“Even though electricity demand for natural gas was at a record high, production was at records, and the expectation of being able to sell natural gas to warm homes didn’t come about,” Flynn said.
“That created a glut that is putting pressure on many of these small producers.”
Amid the unfriendly price environment as natural gas futures languished below $2.000, large exploration and production companies, including EQT Corp., Chesapeake Energy Corp. and CNX Resources Corp. recently said they would cut production.
Daily production scrapes show already declining output. Wood Mackenzie estimated Lower 48 production averaged 100.6 Bcf/d on Tuesday and 101.0 Bcf/d on Wednesday, down from a recent 30-day average of 103.2 Bcf/d.
Analysts with Mobius Risk Group said if the impact of production losses allows for a withdrawal of 10 Bcf or more this week, “it could be enough to stir sidelined market bulls into action.”
If not, the growing natural gas storage glut would continue to exert a substantial bearish impact on prices “as ultra-low spot prices balance near $1.50 to clear spot oversupply,” said EBW Analytics senior analyst Eli Rubin.
Over the next two EIA storage reports, the storage surplus compared to the five-year average may spike more than 125 Bcf toward 680 Bcf, according to Rubin. “Furthermore, adding oft-neglected oversupply in Canada will take the North American natural gas surplus towards 900 Bcf.
“If weather forecasts for a cool end of March falter, it is possible that the single mid-January EIA weekly storage withdrawal from Winter Storm Gerri (-326 Bcf) will be greater than the cumulative withdrawal for all of February and March,” Rubin added.
But the outlook for natural gas may soon turn more supportive, according to the analyst. Daily spot prices are testing 25-year lows, adding about 3.0 Bcf/d of price-induced coal-to-gas switching in the power sector, and production scrapes indicate supply is down 3.0-4.0 Bcf/d over the past five weeks.
“While an extended period of price weakness may be required this spring to maintain price-induced demand gains and keep supply off the market – particularly during typically weak shoulder season – the narrative of building oversupply may shift over the next 60 days,” Rubin said.
