David - A supply imbalance does not mean that there is no demand at all, and NA is now in high demand season. You need to remember that the majority of NG peak usage still comes direct from production (as opposed to draws on storage).
Therefore, cold weather will certainly increase the immediate load from time to time and cause short term price runups and associated short covering. It's just that IMO these little demand runs won't absorb the stockpiled surplus over the course of the whole heating season.
However, as winter passes, cold weather heating requirements are effectively eliminated as a demand factor. That means demand can be more precisely calculated by plant managers, and commercial users will be in an increasingly safer position to exit the spot market if prices rise and just draw on their storage to get them by.
As for why prices seem to be hanging in there, it's still a little early in the game to have commercial users dipping into their stash too heavily, and most speculators long storage are holding out in hope of higher prices. In essence, everyone knows the bubble is there, but in terms of today's transactions, it can be ignored.
But time is working against the NG longs. Because of the record size of the current storage supply, end users are already in a stronger position than normal to withold purchasing gas at unattractive prices. As winter wanes, that position will get stronger and stronger, killing off any price rises for lack of competitive demand.
Producers can't just turn off the valves and cease production to rectify the situation because (a) they aren't that organized, and (b) that would cut themselves off from recovering monies they've already invested. Producers react to lower prices instead by the lag response of not replacing their production, i.e. they stop drilling and exploring, because they can't justify the capital cost at the lower price level.
It's a self-correcting cyclical process that will eventually result in a lack of supply once again, but sometimes it can be a long wait in between cycles. |
