The coldest weather in years has hit the Mid-West in the first half of January setting up a potential natural gas storage crisis before the winter is over. As detailed in the article a Cold Winter Could Lead To A Massive Natural Gas Futures Price Spike, the storage in the East Region is not only currently below the five year average, it is also below the five year minimum. The article written in December said it would take both a cold January and a cold February to lead to a potential crisis. The first half of January is now much colder than normal, but it will still take a cold February to lead to a crisis. No one knows yet what the winter weather will be in February. Investors looking to take advantage of price spikes in the natural gas markets should be on alert and be prepared to move quickly if February turns cold.
According to the EIA Weekly Natural Gas Storage Report for December 27, 2013, natural gas storage in the East Region was 1,501 Bcf. That same report shows the five year average storage for the East Region to be 1,727 Bcf, a 13.1% deficit. But more importantly the five year minimum storage level for the East Region is 1,582 Bcf for that same date. Natural gas storage in the East Region is already 82 Bcf below the minimum before the two cold fronts that hit the East Region last week and this week are factored in. The amount of storage withdrawn from the East Region by the two cold fronts will be reported on January 9 for the week ending January 3, and on January 16 for the week ending January 10. There will still be 10 weeks left before the official end of winter on March 21. Last year the first three weeks of Spring saw almost 100 Bcf of additional withdrawals from storage in the East Region.
The week ending December 13 saw a record 285 Bcf of storage withdrawals for natural gas. In that report the East Region had a draw of 133 Bcf. New York and Chicago represent the two primary areas of East Region demand. According to AccuWeather the temperatures will be much colder in both areas for the weeks ending the first two Fridays in January compared to the week ending December 13.
New York AccuWeather reported temperatures for the week ending December 13 showed the coldest day had a maximum high of 30 degrees and a minimum low of 23 degrees. Compare that to the week ending January 3 with the coldest day having a minimum low of 9 degrees and the week ending January 10 with the coldest day having an estimated maximum high of 13 degrees and an estimated minimum low of 8 degrees. It should be noted the official temperatures for New York City are taken in Central Park and on cold days tend to be warmer than the surrounding areas.
The temperature differentials in the Chicago area are much more pronounced. According to AccuWeather the coldest day in Chicago for the week ending December 13 saw a maximum high of 22 degrees and a minimum low of 1 degree. Compare that with the first two weeks of January. The coldest day in Chicago for the week ending January 3 was a maximum high of 14 degrees and a maximum low of 4 degrees. For the week ending January 10 AccuWeather is estimating the coldest day in Chicago will have a maximum high of minus 9 degrees and a maximum low of minus 12 degrees. Since the temperatures in Chicago are currently minus 15 degrees below zero it is a safe bet the coldest day will be a little colder than estimated by AccuWeather.
The point of showing the comparative cold is to highlight the strong demand on the East Region for the weeks ending January 3 and January 10. Bentek is one of the suppliers of natural gas storage data to the EIA. Bentek is estimating total U.S. demand hit 125.2 Bcf today, an all time record. They expect higher demand tomorrow.
I do not know how much gas will be withdrawn from storage over the next two weeks in the East Region, but it could be a record. I do not know how the natural gas futures market will react when these reports come out. The weather forecasts for February will play an important part in the market's reaction. However, if withdrawals from storage continue over the rest of the winter at a similar pace to the first half of the winter the East Region could have a storage crisis. In a storage crisis the only tool available to the natural gas futures market is to raise prices to encourage more supply and discourage demand.
In the shale gas era of the last few years natural gas pricing has totally disconnected from oil pricing. But the energy content differential is 5.8 mcf to 1 barrel of oil. People may assume natural gas prices will never again trade based on oil prices. But once the natural gas market prices out all coal to gas switching, if storage remains too low it will have to price out something else. Inevitably, in a storage crisis, the natural gas market will have to price out all of the gas to oil switching. This means natural gas prices will have to trade so high that power generation companies and industrial users of natural gas that have the capacity to run their plants on oil rather than natural gas will do so. This would require oil prices to trade below 5.8 times natural gas prices, perhaps way below to force all the switching possible. With oil trading near $100 per barrel near term natural gas prices would have to rise above $17.25 per mcf to force users to consider switching from natural gas to oil.
Investors can take advantage of a potential storage crisis in the East Region by buying the United States Natural Gas Fund (UNG). The United States Natural Gas Fund is an ETF based on the current month natural gas futures contract traded on the NYMEX. Investors looking to participate in the 12 month natural gas futures strip traded on the NYMEX can purchase the United States 12 Month Natural Gas Fund (UNL).