A severe Arctic cold blast has hit the central United States, causing natural gas prices to skyrocket as demand soars and supply infrastructure struggles to operate in the extreme temperatures. Key natural gas production regions in Texas and surrounding states have faced days of sub-zero temperatures, freezing gas wells and pipelines and curtailing output. With heating demand spiking to record highs, natural gas inventories are rapidly depleting just as homes and businesses need gas supplies the most.
Lead Up to the Cold Blast Crisis
Natural gas entered 2023 trading around $3 per MMBtu, down significantly from the 14-year highs above $9 seen briefly in late 2022 during an early cold snap. Mild December weather allowed gas in storage to recover back close to the 5-year seasonal average after draws during November and early December.
The mild start to winter contributed to a general complacency about energy supplies heading into January. But long-range weather models began predicting a major shift in the weather pattern in mid-January, with cold Arctic air forecast to plunge deep into the Plains states. By January 8th, spot natural gas prices at key hubs were already trading over $5 per MMBtu on the forecasts.
Arctic Outbreak Slams the Southern Plains
On January 10th, the leading edge of bitterly cold Arctic air began sweeping across the Plains. Temperatures rapidly fell below zero degrees Fahrenheit across Oklahoma, Texas, New Mexico, and surrounding states. Strong winds drove wind chill values as low as -30 to -50 degrees in areas not accustomed to such extreme cold.
By January 11th, gas production regions from New Mexico’s Permian Basin to North Texas’ Barnett Shale were in the grips of a truly historic cold outbreak. Gas processing plants began shutting down due to freezing components. Wellheads froze. And the extreme cold made it dangerous for crews to access production sites for maintenance.
Table 1 shows the progression of the cold blast through key gas production regions:
|Oklahoma City, OK
With supply infrastructure freezing up but homes and businesses cranking up their heat to stay warm in the extreme cold, natural gas inventories began to rapidly deplete. Natural gas prices exploded higher, with spot prices in West Texas surging from around $5 on January 10th to over $20 per MMBtu on January 14th.
Futures contracts also rallied, with the February NYMEX natural gas contract spiking from $3.50 in early January to as high as $6.00 on January 14th.
Record Winter Demand Across Multiple Sectors
In addition to strong heating demand, the cold blast led to surging natural gas demand from the electric power sector. Gas-fired power plants ramped up output to meet spiking electricity demand for heating. Power generators had to compete with homes and businesses in procuring natural gas supplies even as cold-stricken infrastructure crimped gas output.
The cold has also hit coal supplies, as freezing rivers and rail lines disrupted coal deliveries to power plants in key areas. Nuclear power plants have also felt the effects of extreme winter weather. In Texas, two nuclear reactors tripped offline due to cold-related equipment issues at times of peak electricity demand.
The cold blast could not have come at a worse time for the liquefied natural gas (LNG) export industry. LNG feedgas demand hit new highs in early January, averaging 13.0 billion cubic feet per day. The loss of gas production from Texas wells is reducing supplies available for LNG export terminals along the Gulf Coast. Some terminals may be forced to curtail operations temporarily if gas receipts decline substantially from connected pipelines.
Storage Inventories Face Biggest Winter Depletion in Years
Entering the key winter heating season in November, US natural gas inventories stood slightly below the seasonal 5-year average after a hot summer and strong LNG feedgas demand prevented a complete rebuild of storage. Inventories entered January about 7% under the 5-year average.
Table 2 shows weekly natural gas inventory changes this winter:
|Total Storage (Bcf)
|vs 5-year Average
While only normal to moderately above-normal inventory draws occurred in November through early January, the extreme Arctic outbreak has completely shifted the supply-demand balance. Natural gas storage facilities saw record withdrawals during the week ending January 13th, dropping below the key 3 Tcf threshold.
Potential for Supply Shortfalls Before Winter Ends
With extreme cold still gripping key supply regions in the Southern Plains as of January 15th, natural gas production remains heavily impaired. Yet peak winter heating demand will continue for weeks across much of the central and eastern US. Natural gas storage inventories still have to handle heavy withdrawals through the rest of January and February before heating demand starts to subside into spring.
The massive inventory draws so far this year mean supplies remain vulnerable to any additional late-season cold blasts. Natural gas futures markets will closely monitor the weather in February and March for any signs of a late cold snap emerging. Even a few weeks of below-normal temperatures in March could force gas prices sharply higher on supply shortage fears.
For now, all eyes are on the next week’s weather forecast for Texas, Oklahoma, New Mexico and other critical gas-producing zones. Any moderation in temperatures and winds over the next several days will be critical for allowing the return of drilling and production activity slowed by the historic Arctic blast in mid-January. But the race is on between Mother Nature and the natural gas industry to resupply regional inventories before the next cold demand spike potentially emerges.
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