After posting copies of the energy price charts for January 22, 2014 and highlighting the three delivery points in the eastern US where daily spot market natural gas prices have skyrocketed to more than $70.00/MMBTU (1840 euros/1000 cubic meters), I received the following comment:
Doesn’t this have more to do with there not being enough pipeline capacity in the Northeast region? It is not a matter of being unable to extract enough gas out of the ground. The problem is not enough pipes, which is a problem that can be corrected.
That is certainly what the natural gas marketers would like people to believe, but there is a little more to the story. Here is an image showing the trends in natural gas storage in the US. This graph is updated each week on Thursday, so the last number on the graph reflects the somewhat warmer than average week ending January 17.
Pipeline constraints and price spikes serve to cap the use of natural gas during periods when customers want and need it the most. Even with that cap, the storage report is showing that production is not keeping up with demand. It also show that the US risks approaching the end of the winter heating season with empty reservoirs.
As of the week ending January 17, total gas in storage was 2,423 Bcf, which is 19.8% lower than the same time in 2013 and 13.2% lower than the five year average. The weather people tell us that there are more cold weeks coming. Here’s a quote from January 23, 2014 article on SFGate.com titled Natural Gas Heads for Biggest Weekly Jump Since 2012 on Cold, that shows I’m not the only analyst who has noticed the risk.
Stockpiles may slide to 1.385 trillion cubic feet by March 31, Michael Hsueh, a strategist at Deutsche Bank AG in London, said in a note to clients today. Supplies totaled 1.687 trillion as of March 29 last year.
“We view the U.S. natural gas market as one prone to price spikes, particularly given that storage is already at a low level and we have two more months of winter remaining,” Hsueh said.
Part of the challenge these days is that the physical storage systems and operating procedures were established at a time when there was less gas used in electricity production. Then, storage could be filled during the summer and shoulder seasons to be ready for winter. Now, because more gas is used year round in power generation, there is less excess available to go into storage. The reservoirs were already below the five year average annual peak when winter started.
Of course, this winter’s higher prices will encourage some drillers to move equipment and teams out of shale oil into shale gas, but oil prices are high enough to discourage that decision until gas prices are substantially higher. Moving drilling rigs is a high inertia enterprise; it happens over a period of months, not days or weeks.
When natural gas prices go high enough to encourage more production, what is the implication era of “cheap gas?” Once investments are made into more storage capacity, more production and more drilling, what happens to the value of those investments when we experience several mild winters in a row?
Please understand my point; I don’t dislike gas or even gas drillers. I dislike the marketers who have seduced so many people into believing that we can base our energy system on a single, volatile fuel whose price has always been subject to wild fluctuations when near the balance between supply and demand.
It should be no surprise to anyone that I don’t believe that more wind is the answer. I’m also pretty safe in saying that solar panels don’t function underneath snow.
Energy markets should be boring; they should not take customers on wild rides.