Since the start of November, a confluence of cold temperatures, production setbacks, and infrastructure maintenance, has conspired to push natural gas prices (NYMEX:NGG14) to the highest level since last April for a front-month contract (Chart 1). At current prices, natural gas loses competitiveness with coal-burning electricity generation, and it is unlikely that such high prices can persist for long without damaging the demand side of the ledger.
Chart 2 shows the total working natural gas in storage in the United States; the dotted line is the current data, while the solid black line is the five-year average. Due to rising production from shale development (Chart 3), it has become the norm for natural gas in storage to exceed the historical average at this time of year, which explains the market’s strong reaction to the quick pace of withdrawals at the outset of the heating season.
The unseasonably cold weather did not simply increase the demand for natural gas earlier in the season than had been expected; it also curtailed production in the Permian, Eagle Ford, and Barnett shale – areas that have been at the forefront of expanding production, and those that are not accustomed to below-freezing temperatures. This came on the heels of widespread well and pipeline maintenance that temporarily reduced production in September.