You know your supply scenario better than anyone does, so this may not apply to you. That said, I wanted to pass along some conversations I have had recently with folks in the Midwest and concerns they have.
There is one retailer in Illinois who just two weeks ago was telling us he was concerned he was going to be too long heading into the winter. Now, two weeks later and after grain drying demand, he knows he is now in a short position and has had to burn through some of the contracts he set aside for the winter in order to cover some of the contracted prices he set aside for grain drying. I’ve heard this from a few others, as well.
I do recall having this very conversation with some clients this summer, saying this type of scenario was going to be a concern if grain drying did manifest itself in an impactful way. For the majority of Iowa, southern Minnesota and Wisconsin, the northern half of Illinois and much of Indiana, grain drying demand has been solid to strong. The strain on the pipeline system is all the evidence we need to support these local reports.
For the sake of illustration, let’s assume the anecdote from above turns out to be more common than not. This means retailers will be needing to buy more gas than they expected, having chewed through some of their contracts they set aside for the winter. This means they will either be in the market buying hand to mouth, or they will step in and buy some outmonth contracts in order to replenish their stock. There may also be a mix of both.
If we see hand to mouth buying, this will keep pressure on prices and may cause them to move higher. If that happens on top of good or better home heating demand, the prices we are seeing right now may look like a bargain 30 to 60 days from now.
I wish I could guarantee what will happen, but the best thing I can do is to try and present plausibly possible scenarios and provide an educated analysis of what we might see and how one can protect themselves from spot spikes.
Another factor to consider is inventory levels. I submit the following graphic for your consideration. The number on the left is inventory levels in the Midwest for 2013, and the numbers on the right are where inventories were one year ago:
Take special note of the October to November 2012 numbers. We drew down just 1.1MM October to November. The last two weeks of inventory reports for the Midwest have shown draws of 700K and 900K. In my opinion, I think there is a strong likelihood that we will be beneath 20MM by the end of December, if not quite a bit below. From December 2012 to January 2013 we saw a draw down of over 6MM then another 3.8MM from January to February.
I don’t think last winter was horrible and probably closer to average, excepting the abnormally cold March. If we have the same levels of inventory draw this winter as last winter between November to February, which would be a 15MM draw, we will be flirting with the 5MM inventory level. What if we have a colder than normal November, December or Jan? It could get very, very crazy.
As I said to start the email, you know your specific situation better than anyone and drying in some of the area your company covers won’t be the same as what you experienced farther to the east. But if you are finding yourself behind the eight ball as it relates to being in a short or shorter than comfortable position right now, it may be a good time to step in a buy a piece, even at these numbers.