Fortunately for utilities eyeing natural gas prices for the coming winter, forecasts by The Farmer's Almanac are about as accurate as a coin flip. Unfortunately for them, official long-range temperature forecasts are only slightly better.
While the almanac warns of a very cold winter, government forecasters point to a mild El Niño pattern in the Pacific Ocean, which lessens the odds of a frigid North American winter in parts of the country that rely heavily on the fuel for heating. That matters more than usual this year because, despite being a decade into a glut with no end in sight, there is little margin for error over the coming months.
Domestic natural gas production of about 82 billion cubic feet a day isn't nearly enough to provide for peak winter demand, which is why up to about 4 trillion cubic feet of gas is stored underground and nearly 3 trillion drawn upon during some heating seasons. This year, though, the U.S. Energy Information Administration expects the starting amount at the end of next month to be around 3.3 trillion cubic feet--the lowest since 2005, when natural gas prices hit their all-time high. A projected ending storage level much below 1 trillion cubic feet often spooks traders.
A 2005-style hurricane-fueled squeeze is out of the question, but a big price spike isn't. It was just four winters ago that a cold winter caused a 75% surge in futures prices to above $6 a million British thermal units.
So far there is little sign of anxiety among traders, with both front-month and February futures below $3. Thursday's weekly inventory report and forecasts for continued builds in coming weeks were encouraging, yet storage is now 20% below year-ago levels and 18% below the five-year average. Possible tough sledding ahead.