Andrew Soto How does natural gas pricing take into account increasing storage capacity?

The amount of natural gas that is stored in the nation’s underground natural gas storage fields has long had a significant impact on wholesale natural gas prices.  It seems logical that when the amount of gas in storage is relatively low, gas supplies available to meet demand are not as plentiful thus putting upward pressure on price.  Equally, when the amount of gas in storage is relatively high, gas supplies available to meet demand are more plentiful thus putting downward pressure on price.  Further, during the traditional summer injection season the need to fill storage in preparation for meeting peak needs during the winter can compete for available natural gas supplies with other demands such as residential, commercial and industrial uses as well as electric generation.  Therefore, relatively low levels of gas in storage during the injection season may put upward pressure on prices, and relatively high levels of gas in storage during the injection season may put downward pressure on prices.

The Energy Information Administration (“EIA”) tracks the amount of gas in storage and reports weekly estimates of working gas volumes held in underground storage facilities at the national and regional level every Thursday at 10:30 a.m. Eastern, on their website.  In addition to the estimate, EIA posts historical comparisons that market participants use in pricing wholesale natural gas.  EIA reports both the level of gas in storage compared to one year ago and the level of gas in storage compared to a band of storage levels over the past five-years, including a five-year average.  These comparisons suggest that when gas in storage is “relatively low” or “relatively high” for pricing purposes is “low” or “high” relative to history (last year or the last five years).

What is confusing about that comparison, however, is that the amount of gas able to be put into storage has increased over the years.  Since 2000, the Federal Energy Regulatory Commission (“FERC”) has authorized the construction and operation of over 785 Bcf of new storage capacity.  It seems to me that the amount of gas in storage compared to history should mean less for pricing purposes than the amount of gas in storage relative to being full or empty.

Recently, EIA published an update on Estimates of Peak Underground Working Gas Storage Capacity in the United States that showed estimated peak working gas capacity and estimated peak working gas capacity as a percentage of working gas design capacity.  These figures were compared to actual volumes in storage at the end of April 2008 and April 2009.  I think EIA is on the right track here.  It makes more sense to me to report the amount of gas in storage as compared to having a full tank so to speak than compared to where the amount was at some point in history.

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