Winter 2013-’14 may be on its last legs, but the experience is still fresh in the minds of many natural gas consumers across the upper Midwest. The coldest winter in the past ten years bundled a host of factors that lifted regional spot prices to unheard-of levels in the shale era. Spot prices spiked above $40 on three separate occasions at Ventura and the price differential between the monthly New York Mercantile Exchange settlement at Henry Hub in Louisiana and the regional Ventura monthly index widened from a discount of 8 cents in December to a premium of $5.64. Understanding the dynamics wreaking havoc on regional prices can help natural gas consumers assess the risk of a repeat performance in the upcoming winter.

The key underlying factor driving the regional premiums was weather related demand. The past winter could be described as cold, but leaving it there is insufficient. Out of 22 winter weeks from Nov. 1 through the end of March, population-weighted temperatures have been warmer than normal only six times. Conversely, six weeks this winter have been at least 25 percent colder than normal. This cold weather has interacted with the natural gas market in a number of ways. Storage inventories were drawn down rapidly from December through March dropping below the five-year lows in January and project to be at the lowest levels in over decade by the end of the heating season. With less gas in storage available to meet peak demand days in January through March, pipelines relied more heavily on gas transported from producing areas of the country to meet demands on their systems. This asymmetry between supply available at the field and pipeline transportation capacity limits was crucial to driving the differential between market and field pricing hubs to painful levels for many natural gas consumers.

To add salt to the wound, a number of logistical issues created further complications. In late January, a significant source of supply for the mid-west market was interrupted, when Transcanada’s Emerson natural gas lateral experienced an explosion, completely cutting off supply to Viking pipeline, which delivers to consumers in Minnesota and Wisconsin, and is source of supply delivering into the western portion of the Chicago market. The Chicago market faced additional challenges as a second pipeline (NGPL natural gas pipeline) experienced challenges in providing sufficient compression to move gas up from the Southwest and the Gulf Coast throughout the month of February.

The combination of limited storage inventories and pipeline transportation issues in the Midwest market has wrought havoc on prices for end-users of natural gas. While the receding cold weather will ameliorate the dire pricing environment experienced through March, inventory levels throughout the injection season should be monitored closely to determine the likelihood of a repeat of this experience in the upcoming heating season.