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Gas Storage: What Moves the Market & What Doesn't

Fortnightly Magazine - December 1997

to have plenty for that "coldest day."

At the end of the heating season, withdrawals tended to fall to lower levels than at the beginning of the heating season, reflecting the fact that inventories have been drawn down, reservoir pressures are low and resulting deliverability is reduced.

This year-to-year seasonal pattern of storage use suggested a link to standard industry practice. For our analysis, we needed to remove this seasonality from the data. By "deseasonalizing" the data, we removed the variation in the data that could be attributed to standard industry practice. We did this to isolate the effect of temperature on changes in withdrawals, independent of the seasonal operating practices of the industry.

There are several ways to "deseasonalize" the data. We chose to take the difference in both withdrawals and temperatures between current and past seasons. To derive the withdrawal differences, we took the withdrawals of any given week in the current heating season and subtracted the withdrawals in the same week of the previous season. To derive the temperature differences, we took the average temperature in any given week of the previous heating season and subtracted the average temperature in the same week of the current heating season. Positive differences meant greater withdrawals and colder temperatures, respectively, in current years over previous years. Figure 4 reveals how strong the linear relationship is between these two series.

When we regressed our deseasonalized withdrawal information on our deseasonalized temperature information, we found that temperature explained more than 75 percent of the variability in our withdrawal series.

Constructing the Price Variable

To construct our price variable, we repeated the technique of taking differences. But this time we compared the price of gas during the current heating season to what it might have been when purchased for storage. A large part of working gas inventories withdrawn during a given heating season are injected into storage during the immediately preceding non-heating season, i.e., the months of May through October. In fact, over time we expect an increasing proportion of the gas injected during a non-heating season to be used during the subsequent heating season, as a mark of the industry's increasingly efficient use of inventories in a competitive environment.

We computed a weighted-average price for gas during the non-heating season. For this computation, we used the Transco Zone 65 price series,[fn2] weighted by the ratio of weekly net injections reported by A.G.A. for the 29 weeks not included in our definition of the heating season, to the total of net injections during those 29 weeks. This gave us an estimate of the average cost of gas during the injection season. Next, for each week in a particular heating season, we subtracted this weighted average injection season price from each of the Transco Zone 6/CNG weekly prices.

Positive price differences indicated heating season spot gas prices are higher than what might have been paid for gas injected into storage. Negative differences indicated heating season spot prices are less than an average of non-heating season (or injection season) prices. Negative values also implied that costs of