THE WALL STREET JOURNAL

 

Winter's Toll on Gas Inventories May Last
By Spencer Jakab
March 5, 2014 3:32 p.m. ET

 

The polar vortex will soon be history, but its impact could linger for months in one vital industry.
The U.S. natural gas market is entering the final month of "withdrawal season," when gas is taken out of
storage to meet demand, with surprisingly low inventories. The government is expected to report
Thursday that storage fell by about another 140 billion cubic feet last week.

 

Citigroup estimates that the period from April through October, when gas stores are traditionally
replenished, could start with inventories of 875 billion cubic feet—a little over half as much as a year
ago.


Some of the traditional levers for rebalancing gas supply and demand have become rusty after years of
glut caused by the shale boom. For example, elevated prices between 2003 and 2008 forced industrial
gas users to cut consumption. Today, gas-dependent industry is resurgent and gas-fired power plants
have taken market share from those burning coal.


Until relatively recently, U.S. gas supply was said to be price inelastic. Geology dictated that producers
couldn't respond much to higher prices by raising production because they already had an incentive to
pump all they could.


In theory, the shale bonanza solves that, but it may not always in practice. For example, production
growth in some areas faces constraints due to a lack of adequate pipeline capacity.


Canadian gas imports traditionally have stepped in to cover any gaps. But the winter has also left
Canadian gas inventories unusually low. Imports probably will fall this summer year over year.


The upshot is that rebuilding storage this summer will be a slog even if temperatures are normal. Strong
industrial demand or a scorching summer, boosting air-conditioning usage, could make that much
worse. Every extra molecule of gas that is burned is one that won't be available to store for next winter.

Add it all up and while the impact on prices this summer shouldn't be severe, futures prices for next
winter might be a different story.


Consider the fact that underground gas storage started off this heating season at extremely comfortable
levels before falling precipitously, causing gas prices to jump by almost half between early January and
mid-February. Lower starting reserves this year could make even a normal winter dicey and a cold one
very expensive indeed.


Write to Spencer Jakab at spencer.jakab@wsj.com
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