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Permalink Reply by Mattie on September 10, 2009 at 13:49

Most capacity of storage fields across the nation is leased by Local Distribution Companies (LDC's), which are primarily gas and/or electric utilities. Their agreements have specific requirements to reduce their inventories by the end of a certain date (typically by end of March or April), and have monthly "ratchets"/prorata withdrawal requirements based upon a specific field's capability. Even multi-cycle storage caverns (salt domes) with 8+ turn capabilities have requirements for withdrawal. In general, there is a seasonal injection (spring/summer/fall) and a seasonal withdrawal period (winter) for conventional storage holders and the flexibility on keeping inventory in the field is limited by field capability and contractual rights with the storage operator/owner.

Also, the writer is assuming that the purchasers of this gas get to "keep" any profit made from cheap prices - not the case, as most LDC's have a "fuel component" filing requirement with FERC and the state regulators that essentially require them to "pass through" those savings to residential/industrial customers under future rate cases......not as simple as stated above.

With respect to marketing/trading companies who control certain capacity rights in storage, those who held out on injection of all of their rights enjoyed low-cost gas in the past few months, but if not hedged earlier in the season when NYMEX prices were much higher, they do not get the benefit of a significantly larger margin (spread between injection cost and withdrawal value). For example, from a pure trading perspective, a marketing company would be better served to buy gas at $4.00 and sell the NYMEX at $7.00 versus buying gas now at $3.00 and selling the NYMEX at $5.50. Net/net, the margin is $0.50 greater under the $4.00 gas price scenario. Unless they are authorized within their trading limits and willing to speculate on lower gas prices by selling the winter NYMEX and remaining "naked" on the gas purchase price, the spreads were probably better at the higher overall prices. Most trading positions are managed by upfront hedging of both purchase and sale of NYMEX and basis for injection and withdrawal season in order to capture a guaranteed "spread" value.

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