Trouble Ahead: Forward Look Of Natural Gas Storage Requirements

by: Robert Boslego

Summary

EIA's 5-year storage range and averages are misleading.

Storage adequacy depends on consumption.

Future consumption growth implies higher storage needs.

Higher storage requires higher production.

Futures prices do not provide enough incentive.

I have pointed out that 5-year natural gas storage range and average provided by the Energy Information Administration (EIA) is pretty misleading as a gauge of supply adequacy.

That's because there has been tremendous growth in consumption so that the same storage levels cover fewer days of supply. On a 12-month moving average, to adjust for seasonality, consumption is up over 10% from 5 years ago, even though temperatures were unusually warm this past "winter."

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A commenter to recent articles I wrote asked what storage levels would have to be in future years to be adequate. To address this question, I calculated days-of-supply (DOS) at end-October in recent years.

I calculate this figure by dividing ending October storage levels by October consumption. For this October, I am using an estimate of 3,900 billion cubic feet (bcf) and the EIA's October consumption projection of 65.77 bcf/day. The average DOS figure for these five years is 61.16.

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The next step is to estimate future consumption. I have recently published my own projections of future consumption based on my model. My projections are about 1% higher than the EIA's.

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But for the sake of this exercise, I used the EIA's consumption projection for 2017. I also calculated the average annual growth for 2012-2016 to be 1.8%, and used that average for 2018-2020.

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I then calculated the required level of natural gas storage in each October in the future needed to provide the average of 61 days of supply. For 2018, 2019 and 2020, the levels are 4,084, 4,158 and 4,233 bcf, respectively.

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Finally, I performed a sensitivity analysis to test varying rates of consumption growth to assess the range of storage requirements, based on achieving 61 days of supply. The table below illustrates the range for end-October each year.

Consumption Growth

61 Days of Supply

1%

2%

3%

1%

2%

3%

2017

66.4

67.1

67.7

4,052

4,092

4,132

2018

67.1

68.4

69.8

4,093

4,174

4,256

2019

67.8

69.8

71.9

4,134

4,258

4,384

2020

68.4

71.2

74.0

4,175

4,343

4,516

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Conclusions

The EIA publishes its 5-year range of historical storage levels each week. The graph shows storage levels to be high, but this is misleading in that days-of-supply is the more relevant metric.

Looking forward, it is clear that if consumption continues to grow, as many expect, storage levels must be higher to provide the same coverage. The graphs and tables show why storage must be well above 4 trillion cubic feet in the years ahead.

This analysis begs the question of whether natural gas production will rise fast enough to build storage. Based on my modeled projections, I do not expect to production to rise enough, given the current strip of natural gas futures prices.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.