Natural Gas Futures Spike Amid Preparation for Coming Winter Storm

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Written by Paul Wiseman for Industrial Info Resources (Sugar Land, Texas)--Visions of recent Snowmageddons (such as 2022's Elliott and 2021's Viola, the latter of which followed Winter Storm Uri, that had blasted Texas just days before) dancing in their heads, traders are spiking natural gas prices for February futures this week, as the season's latest arctic blast marshals its forces for a late-week invasion of most of the country.

Natural gas's roller coaster ride began after the Russian invasion of Ukraine ended most of the former's gas exports, rising to $8.81 per million British thermal units (MBtu) in August of 2022. But as Europe found alternative sources of imports, and as U.S. production and LNG-shipping capacities grew in 2023 (the U.S. was the top liquefied natural gas [LNG] exporter in 2023), prices sagged. A warm winter of 2022-23 reduced the drawdowns, and the 2023 storage season ended with five-year highs in the U.S. and elsewhere, keeping prices down.

Industrial Info's Maria Sanchez said that based on U.S. Energy Information Administration (EIA) figures, the 2023-24 heating season storage began at 3,773 billion cubic feet (Bcf), with the week ending December 29 ending at 3,476 Bcf. That's about about 297 Bcf of drawdown. However, this level sits at record highs, which has put downward pressure on prices (or has kept prices depressed under $3 this winter season), until now.

Sanchez added that natural gas production was down more than 2 billion cubic feet per day (Bcf/d), with Texas and Pennsylvania leading the decline.

The 2023 Henry Hub spot price opened at $3.53 per MBtu, rose as high as $3.78 before dropping to $1.74. The year's Henry Hub spot average was $2.53. In fact, most major predictors were expecting prices to remain suppressed for another year or more. But Sanchez reported that prices have jumped 14 cents to $3 per million cubic feet (mcf) as the forecasts started rolling in.

And Industrial Info's Geoffrey S. Lakings sees this storm as an early validation of his long-held contrarian views of $4 to 2024 with the possibility of hitting $5 by May 2024.

Frozen: Let it Go!
But with a winter storm of storybook proportions expected to push temperatures to zero and below in the northern U.S., and into the teens as far south as New Orleans, natural gas drawdowns should explode. The fuel will be called on directly for heating and indirectly for electricity production for heat pumps. The amount of frozen precipitation will vary by region, and predictions of amounts are still in flux. Snow predicted particularly for the Northeast could bring down power lines, further stressing the grid.

Natural gas is relied upon for about 40% of U.S. electricity generation, and about 43% of its capacity. The Union of Concerned Scientists (UCS), a climate change watchdog organization, says that gas-fired plants are more at risk than is commonly believed, and that regulators should take more precautions with those facilities in extreme weather.

Industrial Info has seen February futures reach $3 per mcf this week, with higher numbers possible as the storm is expected to linger for several days.

ERCOT in the Crosshairs
Texas's legendary power grid crash in 2021--led by the ironic mis-prioritization of electricity needed for gas processing plants--to produce enough gas to make more electricity--still resonates. Is the Electric Reliability Council of Texas (ERCOT) ready to live up to the "R" word this year?

Just two weeks ago, ERCOT reported on its final 2023 board meeting, and the organization's chief executive officer, Pablo Vergas, said emergency conditions were not expected this winter, while admitting that "there is increasing risk" because of a continuing increase in demand.

On Tuesday, ERCOT issued an Operating Condition Notification (OCN) for the days expected to be the worst in Texas, January 15-17. The OCN is intended to warn consumers and providers to prepare for extreme cold and the increased demand it causes.

ERCOT has seen that the grid is potentially underpowered for a while. Back in October, it had issued a request for producers to bid on 3,000 additional megawatts (MW) of power, but received bids for only a tiny fraction, at 11 MW.

Continued Cold as Ice
As this front is unfolding, many also see another one following on its heels, said Lakings, which could put further upward pressure on prices as drawdowns continue.

Industrial Info will continue to monitor natural gas prices through this suddenly cold winter season.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) platform helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).