Natural Gas Report: Prices Drop as Storage Deficit Falls

By Sumit Roy

Natural gas prices move back toward $4 as forecasts for warm temperatures fail to offset a large storage injection and economic head winds.

The Energy Informational Administration reported that storage operators injected 98 billion cubic feet of natural gas into storage in the week ending June 17, 2011. That was above estimates that were calling for an injection between 89 bcf and 91 bcf, as well as last year’s build of 81 bcf and the five-year average of 86 bcf.

Thus, the inventory deficit against last year and the five-year average fell for the first time in four weeks to 270 bcf and 105 bcf, respectively. These injections into storage are part of the yearly cycle of natural gas supply and demand, and insufficient natural gas going into storage now can mean shortages in the future during peak demand.

After the report, natural gas prices fell significantly and are now back to the lower end of their range in the low-$4/mmbtu area.

The weather last week was fairly mild from a seasonal standpoint, and that was largely the reason why the injection was so large. Cooling-degree days came in at 49, down 22 percent week-over-week and 20 percent year-over-year. In turn, we saw electricity generated drop 4.6 percent week-over-week and 4.1 percent year-over-year.

Canadian storage rose by 25 bcf last week to 366 bcf. That’s more than the 18 bcf injection last year and the 17 bcf five-year average. Overall, Canadian storage is 101 bcf under last year and 41 bcf below the five-year average. A notable year-over-year decline in Canadian imports into the U.S. has allowed more natural gas than normal to flow into Canadian storage, which has caused the deficit to narrow for seven straight weeks.

Putting U.S. and Canadian inventory figures together, total North American storage is now down 371 bcf year-over-year and 146 bcf below the five-year average. Even so, natural gas prices have come down sharply after failing to break through the $5/mmbtu resistance level earlier this month.

Economic worries and growing production levels have kept prices in check despite forecasts for warmer-than-normal temperatures across the nation. Demand by industrial end-users represents almost 30 percent of total natural gas demand, thus any slowdown in U.S. economic activity is certain to have a negative impact on consumption.

NOAA’s 6-10 Day Weather Outlook:

NOAA’s 8-14 Day Weather Outlook: