Winter’s late fall arrival could push natural gas over the edge

Oct. 22, 2003 — With the natural gas injection season coming to a close all eyes are on ‘Old Man Winter’.

With an Enercast projected refill of just under 3.0 Tcf and the general consensus ranging around 2.8-3.2 TcF there simply remains slim pickings in the supply side of the natural gas equation and plenty of weather driven demand. Enercast forecasts total withdrawals to fall well below 1TcF by the end of the heating degree day season.

La Nina conditions previously forecasted by government and many private forecast entities failed to develop this summer. Instead, near neutral conditions currently exist providing no strong indicators determining U.S. temperature and precipitation distributions through the upcoming fall and winter.

However, Enercast predicted that old man winter will arrive in late fall with a vengeance striking the consuming east region.

Skeptics may say what they want concerning the validity of such forecasts, but the numbers tell the story. Since 1961 there has been 14 similar winters with neutral El Nino conditions. When compared to all years the difference is striking.

The winters for the northeast, upper mid-west, and Ohio valley were significantly colder during these key analog years. Winter forecasts detailed in the Enercast Outlook indicated that this coming winter weather conditions may be colder then the historical average for the entire U.S. Enercast forecasted an additional 200-300 HDDs for the New England census region.

These additional HDDs along with strong economic growth may contribute to continued high natural gas prices.

The active fall tropical storm season will also contribute to a colder northeast this winter. The eastern U.S. soil moisture is at a stage of extreme saturation. In basic terms this means more the atmosphere will expend more energy to evaporative processes instead of heating the air temperature, thus leading to cooler temperatures. All of this available soil moisture in the east can also act as “fuel” for northeastern winter storm tracks.

There will likely be continued tight natural gas supplies that could lead to record high natural gas prices this winter, according to Andy Weissman of Energy Ventures Group (EVG). EVG notes that, heading into this winter, the amount of natural gas in underground storage is significantly below year-ago levels and U.S. production is at its lowest level in almost 20 years.

At the same time, demand for natural gas is continuing to grow at a rapid rate in the residential sector and the power sector.

According to Weissman, weather will be the key driver that determines just how high prices spike. If temperatures are even moderately colder than normal, however, all of the ingredients are present for natural gas prices to reach all-time record levels before the winter is over with a potential crippling affect on many businesses.

Given the severe potential impacts of this winter’s weather, large industrial users, producers and utilities dependent on lower natural gas prices, should consider adding a weather derivatives hedge or contingency insurance policy to their risk management portfolio.

Such a move will prove to be the single most important component of their overall risk management strategy.

Source: Enercast