Natural Gas – Chance of a Price Spike?
Natural gas pricing has come off a bit as we have moved through May, but has been volatile around the weekly inventory figures, moving up again yesterday. While inventories have begun to be replenished, they remain well below the seasonal norm. In the most common depiction (first chart) we see the start of a recovery in inventories from the low at the end of March. The question is whether inventories are rising quickly enough – enough to allow all of the gas fired power plants to run flat out through the summer, while at the same time build enough inventory to see us through the winter.
In the second exhibit we take a more analytical view of inventory and look at the statistical significance of the current level. We do this by looking at the historical mean and range for each week and calculating a standard deviation for each week – when the band in the first exhibit is narrower, the standard deviation is smaller, when the band is wider the standard deviation is higher.
While inventories are recovering they are today more statistically deviant from average than they were at the absolute low in March – in other words, they are perhaps not rising fast enough.
The critical question surrounds summer demand, and relief may come from the expectation that natural gas demand will be the highest in regions with the most likely increase in production. The NGL rich fields in the North East are profitable at gas prices of $4.00-4.50, though we are not seeing a meaningful increase in the rig count in this region as yet. This is the region where the demand swing will be greatest from here as the summer cooling demand picks up – it is already high in the South.
Our statistical analysis of deviations from mean has always served us well in the past and so the shape of the second chart is very concerning to us – and suggests that there might still be short term upside to natural gas prices, particularly if it warms up in the North East.