Why Natural Gas Storage Numbers Are Misleading

Another reason I am long NG....


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Seekingalpha.com
By: Bill Francis

I want to look at some aspects of storage that I think have largely been overlooked by the media and analysts in regards to the natural gas storage situation. This is the one thing that people refer to as evidence of poor fundamentals in a natural gas market that is still at a $1 premium to the price of gas last year. It is my belief that the majority of people are just looking at the same stuff that they always had and not really taken into account some of the other aspects that really do matter.

Storage capacity is going to go up every year to stay on pace with rising demand, in fact since 2000 we’ve added on average about 100 bcf to our storage each year according to FERC. I would suggest a better indicator of our storage situation would be rather than compare our current storage number (3052) to the gross 5 year average of overall storage (2875); it would be more telling to take into account this new capacity and compare the percentage of storage capacity filled.

Using the EIA's Peak Storage Capacity analysis and the FERC’s filings for new capacity and expansions I was able to determine what the working gas design capacity was in August for the past 5 years. Over that time we’ve added roughly 750 bcf of designed storage capacity to our infrastructure. Remember this is the design capacity not storage capacity which is going to represent a larger number. Since you derive the storage from the design and they usually move in proportion with each other I feel as it is still very much of statistical significance. Plus the EIA doesn’t disclose the other numbers for another year.

As of right now in 2010 we have currently filled up 68% of the designed capacity of all of our natural gas storage. Last year this week we were sitting at 75% capacity. So with the mix of new capacity coming online to hold reserves and a rather weak injection season due to hot weather and a recovering manufacturing complex we are sitting well below last year.

The five year storage capacity average is actually sitting at 72%. So all the pundits that are screaming from the fences that storage is higher than ever are really only looking at the gross numbers. I feel as if they are not taking into account how the midstream industry has planned ahead for the extra demand that comes along with the growth of an economy and the emergence of different gas markets.

In fact the only other times in the 5 year average where the percentage of capacity filled was below 75% at this time was in ’05 and ’08. Of course this was when we were ravaged by two hurricanes seasons that took out 600 bcf and 400 bcf of production respectively.

As of right now there is 110 bcf of storage capacity pending FERC’s decision and over 130 bcf in the pre-filing process or on the horizon. So I don’t see any slowdown in our countries ramp up in storage facilities. This leads me to believe our demand will continue to grow regardless of what production or price does.

Now I’d like to focus more on this injection season’s numbers as opposed to the overall numbers which everyone seems to mistakenly point to as the main evidence for why prices should be low. This season so far we have injected 1437 bcf since the week of March 19th. Everyone will point to our overall storage only being 6% less than last year, but I like to bring in the 1437 number and say that actually this injection season we have injected 10.5% less than last year, which pushed 1607 bcf into the ground at this point.

Instead of us being 6% above the 5 year average, I’d rather shed light on the fact that this injection season we have only injected 2.5% more than the 5 year average. This shouldn’t be used as a negative fact to drive prices lower though because the storage capacity from 2005 til now has actually risen by 20%. So I would assume that we would be injecting more than the trailing 5 year average every single year anyway.

I believe the current fundamentals that make up the injection/withdrawal season going on at the time in relation to the same timeframe in the past are what we need to look at the most. Not the stats that are overly influenced on events from a year and a half ago, in which Industrial demand was nonexistent. That’s the only reason for our overall numbers still being high. In reality Industrial demand has roared back much faster than any supply has been brought online in recent history. To prove my point look at June’s numbers in which our industrial complex burned just as much gas this June as we did before the credit crisis hit, in June of ’08.

In closing, I think people have just gotten way too accustomed to looking at that one graph we’re all familiar with, that shows the red line bouncing in between the spread of the 5 year average and making decisions based off that. Let’s start paying attention to what we’re burning now and what we’re producing now. Yes you still need to look at the overall picture, but when we’re adding 100 bcf of storage each year of course the current year is usually going to be higher than 5 years ago when our capacity was a fraction of the size it is today.

Disclosure: Author long CHK, COP