What's Behind Natural Gas' Resiliency

As natural gas traders proclaim winter's official curtain call with this week's natural gas storage report, it's only appropriate that the number was anemic. A 10 billion cubic foot (Bcf) draw was well below just about everyone's estimate. Yet the resulting reaction in the natural gas market was nothing but a big yawn, as prices didn't react to the news.

Natural gas bears have to be scratching their heads, as storage levels are near seasonal records yet prices remain well above $6 per a million BTUs (mmBtu). While many suggest the tenacity of natural gas pricing is perplexing, there are some very good reasons to listen to the message the energy commodities market is delivering.

Warmer Than Storage Suggests

Although no exact formula exists to directly correlate temperature and gas demand, the relationship is clear. So, given that this winter was -- on average -- two standard deviations warmer than the normal winter, it's not surprising that we used less natural gas between November and April than in recent years. In fact, some pundits are surprised that storage levels aren't higher, given the lack of frigid winter weather across most of the U.S.

Anecdotally, the fact there is not even more gas in storage is the result of one or two variables.

The first is what we'll call "demand habits." The argument here is that consumers kept their homes warmer than in a normal winter, as a lack of colder weather kept heating bills in check. Some have even argued that as the population ages, the amount of gas used during heating season will increase as older Americans ratchet up the thermostat to stay warmer.

While interesting, it's hard to believe that demand habits made a meaningful difference in storage.

More plausible is that natural gas supply continues to shrink as it becomes more difficult to replace rapidly depleting production. Consider the following data points:

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