The so-called ‘polar vortex’ is set to return to the US this week leading to fears that natural gas prices will spike. The polar vortex is basically a large pocket of cold air that normally sits over the polar region but that sometimes gets dislodged south leading to bitter cold over the US and Canada. The same weather phenomenon hit North America last winter leading to natural gas prices topping $6 per million British thermal units (mBtu) in February. Cold weather boost consumption of natural gas, the fuel is used to heat about half of the homes in the US.
Natural gas prices are currently around $4.40 mBtu, up almost 25% over the past fortnight and are almost $1 mBtu higher than this time last year. However, there are a couple of factors that could keep any rise in prices in check this winter.
First, supply growth. Genscape forecasts that total gas production in the Lower 48 will be about 5.1 Bcf/d greater than last winter. This is expected to be countered by lower imports from Canada (1 Bcf/d) and rising exports to Mexico (0.2-0.3 Bcf/d) leaving total supply up around 3.9 Bcf/d compared with last winter.
Genscape estimate that even if the upcoming winter season registers the same temperatures as last winter, demand would grow 2.2 Bcf/d. Crucially much less than the anticipated growth in supply.
“Even under an extremely cold winter scenario, that demand growth will not be sufficient enough to outpace the production growth. And as such, even in an extremely cold demand winter, will not be enough to absorb the growing market length. That’s going to have implications for prices not just this winter, but into the future seasonal markets ahead.”
Second, inventories. U.S. gas inventories stand at nearly 3.6 trillion cubic feet, within 7% of the 5-year average level for that week of the year. According to Pimco, without an extraordinary cold spell stockpiles are likely to hold around 700 billion cubic feet more than they did at the end of last winter.
However, with natural gas prices strongly negatively correlated with temperature and with investor attention perhaps focused on the events of last winter rather than the markets actual fundamentals, natural gas prices may over react, focusing on the immediate short term cold rather than longer term fundamentals.
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