Natural gas inventories in the U.S. are at their lowest level since 2014 for this time of year, raising the possibility that the country enters the winter drawdown season with very few buffers that could prevent a price spike.

The natural gas market is highly seasonal, with inventories drawing down sharply in winter months, roughly November through March, while stocks build up in the late spring through early fall just in time for the next winter. Obviously, the exact pace of drawdown or replenishment depends on a lot of factors, including the swings in seasonal temperatures and the rate of production from shale gas drillers.

A few mild winters led to a glut of supply in 2015 and 2016, keeping prices subdued. In early 2016, for instance, Henry Hub traded below $2 per million btu (MMBtu).

This past winter, however, the market flipped, with extreme temperatures leading to a massive drawdown in inventories. On January 1, 2018, the U.S. consumed an all-time record high at 150.7 billion cubic feet, surpassing the previous record hit during the polar vortex in 2014.

There is a structural issue at play, to be sure. The U.S. continues to shut down coal-fired power plants, switching over to natural gas generation. Also, the abundance of shale gas has led to billions of dollars’ worth of investment into a variety of industrial activities, such as plastics, fertilizers and other petrochemicals. On top of that, the U.S. continues to ratchet up LNG exports, shipping more gas abroad. With each passing year, more and more gas is needed for electricity, industrial activity and for export.

That means that even though the gas market is highly seasonal, the peaks are getting higher while the troughs are also getting higher.

"A series of gas pipelines are set to come online in 2018 in the Marcellus shale, opening up new markets that will allow for higher levels of drilling. Pipelines from Western Pennsylvania and Ohio are stretching northwest into Michigan, south into Virginia and North Carolina and east towards the eastern seaboard."

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