• 3 minutes China has *Already* Lost the Trade War. Meantime, the U.S. Might Sanction China’s Largest Oil Company
  • 7 minutes Saudi and UAE pressure to get US support for Oil quotas is reportedly on..
  • 11 minutes China devalues currency to lower prices to address new tariffs. But doesn't help. Here is why. . . .
  • 15 minutes What is your current outlook as a day trader for WTI
  • 11 mins Domino Effect: Rashida Tlaib Rejects Israel's Offer For 'Humanitarian' Visit To West Bank
  • 2 hours In The Bright Of New Administration Rules: Immigrants as Economic Contributors
  • 13 hours Trump vs. Xi Trade Battle, Running Commentary from Conservative Tree House
  • 3 mins Gretta Thunbergs zero carbon voyage carbon foot print of carbon fibre manufacture
  • 16 mins Continental Resource's Hamm (Trump Buddy) wants shale to cut production.Can't compete with peers. Stock will drop in half again.
  • 12 hours Movie Script: Epstein Guards Suspected Of Falsifying Logs
  • 12 hours US Petroleum Demand Strongest Since 2007
  • 1 day Will Uncle Sam Step Up and Cut Production
  • 1 day NATGAS, LNG, Technology, benefits etc , cleaner global energy fuel
  • 2 days Why Oil is Falling (including conspiracy theories and other fun stuff)
  • 2 days Significant: Boeing Delays Delivery Of Ultra-Long-Range Version Of 777X
  • 46 mins Strait Of Hormuz As a Breakpoint: Germany Not Taking Part In U.S. Naval Mission
  • 52 days To be(lieve) or Not To be(lieve): U.S. Treasury Secretary Says U.S.-China Trade Deal Is 90% Done
Alt Text

The Easy Money In European Natural Gas Is Gone

Traders are unable to take…

Alt Text

Breakneck LNG Demand Surge In China Is History

Chinese demand for LNG is…

Alt Text

Canada’s Natural Gas Crisis Is Being Ignored

While Canadian crude has been…

Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

More Info

Premium Content

A New Trend In Natural Gas: Just-In-Time Supply

U.S. natural gas prices reached the highest maximum level in 4 years this winter. That’s because of a new “just-in-time” gas supply paradigm that relies more on wellhead production than storage. It has pluses and minuses.

In November 2019, weekly Henry Hub spot prices were $4.68/mmBtu, a level only exceeded in January 2014 over the last several years (Figure 1).

(Click to enlarge)

Figure 1. Highest natural gas price maximum in four years.
Source: EIA and Labyrinth Consulting Services, Inc.

That was because winter gas storage was the lowest since then (red fill in Figure 1).

Record gas production and expansion of northeastern pipeline systems led to a new just-in-time natural gas supply paradigm. Dry gas production set a new record high of 88.7 bcf/d in February (Figure 2). Gas output increased an astonishing 17.7 bcf/d from January 2017 and the present

(Click to enlarge)

Figure 2. Record 88.77 billion cubic feet per day dry gas production in February 2019.
Source: EIA STEO and Labyrinth Consulting Services, Inc.

That and new pipeline take-away capacity from the Marcellus and Utica plays led markets to believe that supply was almost infinite."

Gas futures forward curves reflected the new just-in-time paradigm. Before 2017, the “normal” term structure of gas forward curves reflected generally higher future than spot prices. This contango structure included higher frequency seasonal use variations in pricing (Figure 3).

(Click to enlarge)

Figure 3. Term structure of Henry Hub forward curves changed after 2017 from “normal” to “inverted-normal.”
Source: CME and Labyrinth Consulting Services, Inc.

Beginning in about 2017, the term structure for shorter-dated contracts inverted and then, reverted to the normal pattern. This discouraged storage in the short term and resulted in record low inventory volumes going into the winter heating seasons of 2017-18 and 2018-19. Related: Oil Is Set To Rise, But The Rally May Not Last

Although production is at record levels, so are U.S. gas exports. February net imports were -4.52 bcf/d and net imports are expected to reach almost -8 bcf/d by November 2019 (Figure 4).

(Click to enlarge)

Figure 4. February U.S. net natural gas imports were -4.52 billion cubic feet per day.
Source: EIA STEO and Labyrinth Consulting Services, Inc.

Markets may not have fully comprehended that production and supply are not the same thing. Exports reduce the amount of gas available for domestic consumption.

The new gas supply paradigm has led to lower levels of gas-in-storage than in previous years. This in turn exposed markets to higher short-term prices during cold periods this winter.

Many believe that higher prices resulted from a cold winter and that this will not be repeated during more normal winters. That is untrue. So far, this winter has been 3 percent warmer than the norm. Gas price spikes occur when storage is low. Cold weather is an accelerant for price spikes, not their cause.

Just-in-time gas supply is here to stay as long as shale gas and tight oil companies continue to over-produce natural gas. That will lead to lower prices on average. That’s a plus for consumers. We should, however, expect greater price volatility when weather and low storage combine to produce temporary tight supply. That’s a minus.

This winter’s pricing should be a reasonable model for next winter. Let’s see what surprises just-in-time supply provides this summer!

By Art Berman for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play