Natural Gas Storage and Price Action – Back to the Futures
Posted on Jan 3, 2017
Back in August, I wrote that it would be interesting to see what would happen with natural gas prices as we ended the storage season and approached that time of the year when natural gas is drawn from storage. We observed that the average weekly storage injection was running at a clip of 41 Bcf per week, below the average weekly injection of 46 Bcf from 2012. I selected 2012 as the analog for my study since it was the lowest average weekly storage performance we had seen in recent times. I hypothesized that this year if we were to see similar price action to that of 2012, we might expect a price at the end of storage season in the range of $3.50 to $4.00/MMBtu, and in other words, the highest 12-month strip price since the fourth quarter of 2014.
So let’s see where we ended up with the average weekly storage injection and the 12-month strip price at the end of the storage season…
The natural gas storage season essentially ended the week of November 18th. The EIA released that storage (or in this case, the draw performance) report reflecting a net draw of 2 Bcf on November 25th. On that day the NYMEX 12-month forward strip closed at $3.20/MMBtu ($0.30/MMBtu below the low-end range I expected assuming the 41 Bcf average weekly injection was sustained).
Digging further into what happened over the course of September and October that resulted in a bit lower forward price environment…
We can see in the chart above that the average weekly injection increased from 41 Bcf to 46 Bcf. In fact, during the majority of October and into early November, the average weekly injection increased to 48 Bcf before backing down in mid-November. Interestingly, during that time, the 12-month strip dropped in price from $3.41/MMBtu to $2.86/MMBtu.
All in all, we weren’t far off. Prices are in fact trending closest in line with that of 2012, but did not rise as high as my initial range prediction of $3.50 to $4.00/MMBtu at the close of the storage season. However, the outlook for a colder December caused the market to react very quickly, and the 12-month forward strip price rose from $3.00/MMBtu on November 18th to $3.49/MMBtu just eleven days later.
While this exercise was not of your typical technical analysis, it does show the correlation between injection activity and price movement as far as I am concerned. In January, we’ll take a look at the withdrawals and history to see what that might tell us.