Gas Storage: What Moves the Market & What Doesn't
IS TEMPERATURE THE SINGLE MOST IMPORTANT FACTOR IN how gas storage is used? Or are other variables involved? Can we answer these questions - and verify the results?
Since FERC Order 636, natural gas storage has grown into a high-profile asset in the industry. As a result, the industry has responded by changing the way it uses this storage. The exact nature of this adjustment is not apparent at a glance; one must first analyze industry data.
For example, in its 1995 study of natural gas storage, The Value of Underground Storage in Today's Natural Gas Industry, the Energy Information Administration showed storage operators were withdrawing more gas from storage in the summer and injecting more in the winter. Many in the industry were surprised by the degree that this was occurring.
This change in the role and use of storage relates in part to its use as a system-balancing tool. Before Order 636, when pipelines owned the gas flowing in their systems, they could use that gas to achieve system balancing. Now, it is up to individual shippers to acquire the right amounts of gas and service to sustain system reliability. Under competition, these shippers also can take advantage of arbitrage opportunities that surface in a price-volatile commodity market.
Our analysis of storage suggests certain characteristics about its use and provides us with some interesting and useful results. First, it appears that the industry's operating behavior follows almost the same "script" from year to year. Second, while storage use has grown more flexible since Order 636, it still reflects risk-averse behavior or an inability to respond to certain market signals.
Yes, storage withdrawals are strongly linked to temperature changes - in the way we expected. And yes, withdrawals are related to price changes - but opposite from the way we expected. The information presented here summarizes how the industry is responding to restructuring, including reactions to storage levels and withdrawals, temperature and price during the last several years.
Identifying Three Variables
Today, information on storage, including holding and delivery capacities and construction of new facilities, is widely sought and reported. Data on working gas inventories rank alongside spot and futures prices throughout the year, but particularly during heating seasons. In fact, storage data, along with short-run weather data, are probably the most watched numbers in the industry.
Leading into the heating season, interest in weekly inventory and withdrawal numbers intensifies, because storage provides the backup to pipeline supply and is the key source to satisfy excess demand.
Another variable that might affect withdrawals is the price of gas. For instance, if prices increase, then one might expect larger withdrawals, as holders of storage inventory take advantage of market opportunities. And if prices are falling, then one might expect smaller withdrawals and companies might even add to their inventories by taking advantage of low-priced gas.
Finally, inventory levels with respect to anticipated or expected demand also might affect withdrawals. That is, how much gas is on hand vs. how much is expected to be needed. What one might expect is that, as