This week showed another above normal withdrawal from inventory with a new bout of artic air heading to the lower 48. After a week of warmer than normal temperatures starting early next week another round of bitter cold is heading to the eastern half of the United States, which will result in the inventory deficit gap widening further and putting the industry in a challenging position to get inventories back to normal levels by the start of the next winter heating season.
So the big question facing the industry is will inventories build strongly enough during the normal seasonal injection period to get the level back to where it was at the start of this year’s winter season. Right now the way the market is trading in the front-end of the forward curve suggests that the industry (or at least the spec community) is starting to develop a view that this year’s inventory injection season will come up short by the start of the upcoming winter heating season.
This week’s inventory withdrawal of 250 BCF sent my projection for the end of season (EOS) inventory level down to about 1,039 BCF and just about where the season ended in 2004 as shown in the following chart. Obviously there are strong differences in the level of production now versus 2004 as well as the demand level for both of these years.
The following table compares the projected end of season inventory level this year with both last year and the five year average. In addition the table compares the total projected inventory level heading into the upcoming winter heating season (2014/15) using the five year average injection level applied to the projected end of season level for this year.
This comparison suggests that the industry is likely to have a huge challenge in getting back to a comfortable pre-winter inventory level. Whether I compare the projected start of the 2014/15 winter level to last year or the five-year average there is still a huge gap that will have to be made up. With the EIA projecting total U.S. production to increase about 2.2% this year over last year I am not certain that the industry is will be able to get to the five-year start of winter level this year.