Late winter salt storage constraints that helped steepen U.S. natural gas forward curves to near record levels have started to ease with the onset of the injection season, likely providing a tailwind to prompt prices.
NGI December forward prices for benchmark Henry Hub stood at a $1.693/MMBtu premium to May at the start of April, with May priced at $1.769 and December at $3.462, NGI’s Forward Look data show. That’s the steepest premium for May-December at the end of the injection season over the past 10 years.
The factors driving this year’s contango, where forward prices are at a higher premium than prompt, are well established. The warmest winter on record stalled heating demand, swelling Lower 48 gas inventories to crash cash prices to 25-year lows. Meanwhile, the forward curve for late 2024 is pricing in the next leg higher in LNG exports and the return of winter.
The contango is so steep “that the mentality of some is to cram as much cheap gas in the ground as they can,” said NGI’s Pat Rau, director of Strategy & Research.
With nonsalt storage facilities firmly in withdrawal mode, the market relied heavily on flexible salt storage to absorb some of winter’s surplus gas supply. Salt storage levels broke above their five-year range in February as they rose about 50 Bcf to 300 Bcf from late January to mid-March.
“If I’m a marketer with salt cavern storage, I’m buying this ultra-cheap gas now, then selling as much of it as I can in July and August when the power burn comes a calling,” East Daley Analytics analyst Jack Weixel told NGI last month. “I’m betting that demand is going to come back in a big way with the summer heat and I’ll make a shoulder-to-peak summer spread, maybe as much as 50 cents outside of transport.”
Fill ‘Er Up
However, in the rush to use salt storage, the risk emerged in winter that some facilities could fill up.
EBW Analytics Group analyst Eli Rubin said the near-record contango of the New York Mercantile Exchange (Nymex) natural gas forward priced in “the risk of near-term storage broaching all available storage capacity.”
The threat has since eased, with salt storage levels holding relatively flat since mid-March to 299 Bcf in the latest weekly storage report.
The stalled storage build has come as the near-term price structure flattened. In mid-March, Henry Hub cash prices traded at almost a 30% discount to the Nymex front month. However, by last week, the Henry Hub cash had closed the gap and briefly traded in line with the front-month contract. In addition, the May-December premium has narrowed slightly over the past week to $1.610, with Forward Look showing May priced at $1.875 and December at $3.485 as of April 10.
Spot prices have recently been supported by winter showing up for a last hurrah, sustained production cuts and signs of renewed liquefied natural gas strength. Another outlet for gas also is opening up as nonsalt storage facilities are switching to injection mode, increasing the amount of gas that can be stored and sold forward.
Two To Tango
Nonsalt facilities switching back to injection mode could help ease the market’s contango, which is not just a function of higher forward prices but also the relative cheapness of spot prices.
“Once local distribution companies begin to ramp up planned injections into the back half of April and beyond…local prices may find support more quickly,” EBW’s Rubin said.
Adding to that view, Mobius Risk Group analysts said “the recent improvement in spot pricing is the result of the market shifting from withdrawal mode to injection mode, and a strong incentive to inject early.”
As market participants continue to use storage to take advantage of the steep curve, it “should in turn help bring in the current Henry Hub spread to winter,” Rau said. However, he added that there are limits to how far that arbitrage can go because of the limits to how fast gas can be injected and total capacity for working gas storage.
Those limits are such that salt capacity is expected to be needed for injections well into summer.
“The need to have spare salt capacity will remain crucial until peak summer cooling season (late June to early September) as daily injection capacity could become insufficient without the ability to lean on salts,” Mobius analysts said.
Salt Rates Jump Again
Gulf Coast Midstream Partners LLC’s (GCM) Chief Commercial Officer Edmund Knolle told NGI that this year’s steep contango is not unprecedented – the spring-winter spread exceeded these levels in the mid-2000s.
What’s different now is storage makes up a smaller percentage of the natural gas market and therefore has less influence on balancing supply and demand. Price is becoming a more important balancing mechanism as a result, Knolle said.
“Injections will keep happening until contango doesn't pay to transport, inject and store,” Knolle said. “If or when storage hits full, price will find a place where suppliers cut it back to recover price.”
There is a wave of Gulf Coast salt dome capacity additions on the way to handle increased price and flow volatility from the growth of LNG exports and intermittent renewables.
Among the projects are GCM’s greenfield salt storage facility, Texas’ first in more than a decade and Enstor Gas LLC’s proposed an expansion of its 22.4 Bcf Mississippi Hub.
Supporting the projects, developers said monthly salt storage rates had risen into the 20s cents/Dth range from previous teens and single digits.
There are indications those rates are rising even more. In March, Twin Eagle Resource Management LLC and Uniper Global Commodities North America LLC won an auction for salt storage at Petal Gas Storage LLC in Mississippi. They split around 1 Bcf of capacity at a monthly rate of 36.5 cents/Dth over two years, according to a notice published by Petal’s parent company Boardwalk Pipeline Partners LP.
“Available injection and withdrawal at any given time impacts potential volatility,” Knolle said. “Firm injection capacity is a put option on physical gas. That’s why we’re seeing demand charges going up at salt cavern facilities like Petal.”
