US NATURAL GAS INVENTORY: THE PRODUCING REGION DRAWING BOARD © Leo Haviland December 16, 2013

The lofty pinnacle created around 611 four years ago (1/7/10; NYMEX nearest futures continuation) is a distant memory for many marketplace visionaries. So are much higher price peaks prior to this. Especially since mid-2011, US natural gas production jumped due to the shale gas revolution as well as output associated with the petroleum drilling boom. This has built confidence that ample natural gas supplies generally will keep prices fairly subdued. Allegedly inevitable North American liquefied natural gas exports will not become sizable for at least another two or three years from now. Forecast US electricity demand for calendar 2014 is essentially flat relative to 2013. The NYMEX natural price (nearest futures continuation) even fell under two dollars two years ago (190 bottom; 4/19/12)! Recall the important resistance established this spring at 4.444 (on 5/1/13; challenged but not broken by the recent high on 12/13/13 at 4.443). So how on earth could the front month NYMEX price eventually (even if not this winter) ever sustain itself over 450, or even fly up to 500, 600, or even higher?

Yet inventory obviously still matters. History shows that weather can slash working gas inventories in the Producing Region and elsewhere, sometimes dramatically. Thus despite widespread faith in growing production and other supply/demand variables, high or even average national inventories, particularly from the days coverage perspective, are not guaranteed. Consequently if overall US inventories plummet far enough, and even if this is relatively unlikely (as of now) for winter 2013-14, five or six dollars (and yes, even higher) NYMEX prices are not inconceivable.

In addition, alternative “investment” in commodities has reduced the amount of “free supply” in natural gas. This buy-and-hold for the long run activity probably has been more of a factor since around 2003 (or at least 2006) than in the preceding time span. In any event, for any given arithmetical or days coverage gas inventory level nowadays, such investment makes stocks tighter than they appear, though experts can debate how much. “Speculative” buying enthusiasm also may rally prices.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.
US Natural Gas Inventory- the Producing Region Drawing Board (12-16-13)