Waiting for the Next Ice Age

(c) 2009 F. Bruce Abel

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Dec 04, 2009
Waiting for the ice age.
Thursday's gas storage data from the EIA were pretty astounding for the end of November: Historically the period sees gas coming out of storage as winter starts. But storage levels are still growing! This is convention breaking, paradigm shifting and disruptive events rolled into one. The entire point of producing natural gas is that someone will find it useful and burn it. That sometimes gets lost when commodities take on the role of financial assets instead of physical ones.
Why isn't the winter season soaking up natural gas and what are the short term implications? What we don't have figures for is actual demand. A mild November is one definite cause of the glut, but is it the only one? Perhaps not.
We don't know how much demand has increased, or not, from generation demand for example. We can only guess what will happen in the future of the big IF. If the recession ends how much will demand recover? Consider three fundamentals of the US economy:
1. One of out seven mortgages are in arrears
2. One out of eight adults and one out of four children in the US are dependent on federal assistance via food stamps to eat.
3. Whether or not there will be a recovery, it is increasingly looking like a jobless recovery. Jobless recoveries don't increase demand for gas, we need factories to actually build things and use the gas.
The US is still the world's largest economy, as important as EU and BRIC demand is. People who can't afford to eat or put a roof over their head won't be buying any UK or EU products anytime soon either.
The fundamentals of US gas supply are tottering. What would it take to get them back into sync?
The bottom line is that you are at the end of November, and you are still putting gas in the ground," said Stephen Schork, editor of the energy advisory newsletter the Schork Report, adding it would take an "ice age" to send prices significantly higher.
The entire cycle is that winter comes, gas gets used in what Americans call furnaces and the UK calls boilers, and the prices depend on the gap between what comes out of the ground and then goes up in smoke, or to be more exact a vapor cloud. Gas comes out of storage and gets burned, which should be it's destiny. A molecule of gas stuck under ground is not necessarily wrong, but it is pointless and even more so considering that storage itself comes at both a physical and financial cost. Come springtime, gas production gets soaked up again by storage.
But what if springtime comes and much of last year's gas meets next year's gas production and supply and demand fundamentals continue as they were? The collision could be explosive.