Natural Gas Stocks Critically Low

In the wake of the Crimean crisis, there has been much debate about whether the United States should increase exports of liquefied natural gas (LNG).An important and unfortunate detail has been largely overlooked in this conversation: domestic natural gas inventories are at critical lows. Natural gas is stored in underground caverns replenished during the “injection season” from spring to late autumn, when supply surpasses demand. The Financial Times noted at the end of February that this year, producers will need to sprint to bring stocks back to “average levels of 3.8 trillion cubic feet,” and noted, “If they fall short, next winter will again be punctuated by wild price action.” One month later, stored supplies are at the lowest level in ten years. You can blame not only the harsh winter, but also structural changes in the nation’s economy. Yes, we are in the midst of a “natural gas bonanza” and production is surging. But what’s missing from the dialogue is the fact that demand has risen in lock-step. EIA’s data show that demand is 17 percent higher than it was 11 years ago. In February, the FT quoted an analyst who compared the current situation to an inventory crunch ten years ago that “set off a six-year cycle of tightness that sent gas to record highs above $15 per mBtu.” In the same piece, Citigroup was quoted stating that inventories were likely to plunge to 875 billion cubic feet by the end of March—less than half of average levels for this time of year. Inventories were at 896 on March 21—a sign that storage levels have continued to decline in the weeks since. Analysts quoted in the Wall Street Journal note that a sustained rise in natural-gas prices boosts the chances that consumers eventually will pay higher rates. State regulators often have the final say on retail prices, and futures prices play a prominent role in their decisions on whether to permit rate increases. Rising futures prices suggest that investors are questioning the widely held belief that U.S. producers can drill enough to replenish supplies. Indeed, the past winter has proved quite clearly that abundant supply does not mean that natural gas prices can stay low forever, but rather, are more responsive to demand increases than we think.