NEW YORK (Reuters) - U.S. natural gas markets bracing for an autumn price crash caused by overflowing storage may be in for a shock this summer.
Some regions unable to cope with rocketing production are set to fill up by July, leaving a glut of stranded gas that could send already depressed prices into an unprecedented tailspin much earlier than expected.
The 4.1-trillion-cubic-feet U.S. storage system comprises three separate storage regions — the east, west and south. Total capacity is unlikely to fill up until October. Still, if just one oversupplied region reaches capacity, the resulting cavern closures and pipeline restrictions could send shockwaves across the whole U.S. market, prompting a sharp fall in next-day gas prices of the likes not seen before.
Based on last year’s injection rates, the relatively isolated 1.3-tcf producing region storage system in Louisiana, Texas and the surrounding states could be the first to top up, four months before the end of the injection season in November.
The region, which serves the south’s major producers, is hundreds of miles from consuming hubs in the northeast and midwest. Current price spreads make it too expensive to ship gas out of that area, potentially leaving stranded gas in the south.
“The moment of truth could be coming much earlier in the producing region, possibly by mid-summer,” said Dominick Chirichella, senior partner at Energy Management Institute.
When storage restraints and pipeline flow restrictions were announced in the producing region in 2009, price points in the nearby Rockies slumped to 13 cents per million British thermal units within day — a fraction of benchmark prices at the time. And at that time, the situation was not as dire as it is now.
This week, U.S. gas prices fell below $2 per million British thermal units (mmBtu) for the first time in 10 years as inventories swelled. If gas flowing from wells has nowhere to go this summer, there is no limit to how far prices might fall, analysts warned.
“There will be some regions filling up at different times and this could push regional prices to half the NYMEX price, particularly in the Rockies,” Steve Mueller, chief executive of gas producer Southwestern Energy, told Reuters this week. Cash prices — which reflect the value of gas for next day delivery — have recently been just a few cents below futures prices.
Gas stocks tend to fall in winter and rebuild from about April to November, but this year injections into storage began in March at the earliest time in five years.
Storage caverns are at record highs for this time of year thanks to prolific gas production from newly developed shale deposits and mild winter weather, which tempered demand.
Panicked storage owners are already turning away some customers as production from newly prolific shale deposits overwhelms caverns even in the northeast ‘consumer’ region, now home to growing output from the Marcellus shale. Injection restrictions are normally reserved for the end of the injection season when stock levels are tighter.
Producing region storage, with capacity of about 1.3 trillion cubic feet of gas, is already three quarters full and 41 percent higher than this time last year, according to U.S. government statistics. Total storage in the lower 48 states is about 60 percent full and 55 percent above last year.
The U.S. natural gas rig count has dropped to its lowest in 10 years, but production remains at record highs. The U.S. government predicts production will be 5 percent higher than last year.
Producers could pipe gas to the northeast consuming region where storage capacity is greater, but with cash prices at the southern Henry Hub benchmark only pennies lower than in the north, the cost of transporting gas across the country — over $1 per mmBtu — may be too much.
Henry Hub cash prices at $1.91 per mmBtu were only seven cents lower than the Appalachian average on Wednesday.
“The price differential does not appear to encourage an outflow of gas from the producing region,” Citigroup analysts said in a recent note. “Shippers of gas would lose money on the transportation cost.”
Reporting By Edward McAllister; Editing by David Gregorio