Natural gas futures, dipping on a warmer long-term forecast, are likely to spike again after freezing weather takes another big bite out of gas supplies later this week.
The normally very abundant supply of U.S. natural gas could be put to the test this season and could actually see some spot shortages by the end of winter, according to analysts. An unexpectedly harsh cold snap across North America resulted in record gas demand New Year's Day, while at the same time natural gas producers from Pennsylvania to North Dakota are being forced to shut in some production at the well head due to the cold temperatures.
"We could consume upwards of a quarter of the stored natural gas just this month," said John Kilduff, energy analyst at Again Capital. The Energy Information Administration releases weekly data Thursday, and Kilduff said he's looking for a drawdown of 225 billion cubic feet, more than double the normal level for this time of year.
"Things could start to get tight for sure. Even if we have a normally cold winter, things get tight," he said. "These are big demand numbers we're seeing. Monday was a record. I think Saturday could eclipse Monday's record." Analysts said about 143 billion cubic feet of gas was consumed Monday, the largest on any one day in four years.
The U.S. is the biggest natural gas producer in the world, and analysts see no chance that supplies will run out or be unavailable but a shortage could mean prices will be higher.
The unexpected cold spell across North America is now being compounded by a massive winter storm, dubbed a bomb cyclone, that is expected to create blizzard conditions in parts of New England, and potentially dump more than a foot of snow.
The storm is expected to run up the East Coast, creating huge surf and high winds and bringing an even colder wave of frigid temperatures to a third of the eastern half of the U.S. by the weekend. Freezing rain or snow is expected from Florida to Canada.
Natural gas futures Wednesday were down 2.2 percent to $2.98 per million British thermal units, off a high of $3.10 per mBtu Tuesday.
"Overnight we saw warming trends in the 12-to-15 day forecast and the 16-to-21 day," said Jacob Meisel, chief weather analyst at Bespoke Weather. "We're still expecting what could be a record drawdown next Thursday by the EIA for the week ending this Friday. That would include the three-day holiday weekend for New Year's."
Meisel said the futures market is now expecting a natural gas storage to be 1.265 trillion cubic feet by the end of winter, compared with the five-year average of 1.7 trillion cubic feet.
"What the market is focusing on right now is the comparison to the five-year average, and we're going to walk into the spring season with stockpiles below the five-year average. The question is whether we're able to produce our way out of the problem," he said. "I'm confident in saying we're basically walking into spring, 2018 with a shortage of gas."
That means gas prices could be higher. In the cash market Wednesday, prices have been volatile, and Meisel said Henry Hub cash have been volatile and hit a high over $7 Wednesday.
"If there was some sustained cold through the winter, we could see drawdowns as low as 1,000 bcfs," Meisel said. "Right now we're just trying to figure out this warm up. We are having one more cold shot that will be focused Jan. 12 to 14, that spooked the market a little bit [Tuesday]. There are concerns cold could stick around a little longer than anticipated. That's what would get the market going if the warmer weather we're expecting isn't ending up verifying."
S&P Global Platts analysts said they believe the potential for supply shortages is in fact, limited by the rapid production. "Indeed the notion of "just in time" shale production is going to change the way market prices during the peak period for winter demand," they noted, adding that New England is a market where consumers pay high prices due to insufficient investment in midstream delivery and therefore pay high prices during peak demand.
Meisel said it's possible colder weather could return by the end of January or early February . "The forecast at this point is highly uncertain," he said.
Even so, the weather has already been historic. The city of Boston tied its own 100-year-old record Tuesday when it experienced seven consecutive days of temperatures that did not top 20 degrees. Temperatures were expected to be in the mid 20s Wednesday.