Thursday, October 1, 2009

Gas in Storage Up; Spread Narrows a Bit

The all important natural gas in storage figure was released by the Energy Information Agency this morning. It showed a 64 Bcf increase in storage, pushing the gas in storage number to 3.589 Tcf. The 64 Bcf injection is less than one normally sees at this time of year, which caused the spread between this year and last year to narrow from a 16.9% overage to 15.8%. The spread over the five year average dropped from 16.0% to 15.5%. The chart below shows the current storage level (red line) versus the five year average (shaded band).

While it's good to see these spreads narrow, we are still looking at a storage level at an all-time high, and it is still possible that storage might fill up before the end of the month. The overall storage capacity is a theoretical number because storage facilities consist of salt domes and retired oil fields in addition to pipelines and tanks. The biggest concern is that the storage in the Producing Region will fill up first. This might make transportation to other regions difficult and effectively stop production. As the chart below shows, storage in the Producing Region is 30.3% higher than the five year average.

It is encouraging to see less gas going into storage than usual. This is a result of less gas being produced because of fewer drilling rigs working and completions being delayed as well as voluntary curtailments. Gas production in every state but Louisiana was down for the month. In Louisiana it was up 14%((!).

The lower storage injection is also the result of more gas being used in electricity production. I recently read a report that showed gas at these prices is more economical than coal to burn for electricity, which has led to some switching. The increased use in electrical power is helping make up for the significant decrease in industrial gas use, which is down 19% YTD. The chart below shows the industrial gas use versus the five year average.

Going forward, there is going to have to be a lot of switching given the gas industry's newfound ability to produce prodigious quantities of gas, or else the gas industry constantly will be bumping up against storage constraints, which will keep prices low.

Unfortunately, the gas storage news seems to have put a dent into gas prices today. As of this moment, the "front month" futures contract (November) is down 7.5% to $4.48.

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