U.S. NatGas Prices Caught in Crossfire: Kemp

U.S. natural gas prices are caught in the crossfire between warmer-than-normal weather and a structurally tightening supply-and-demand balance.

Working gas stocks in underground storage rose by 73 billion cubic feet to 3,909 billion cubic feet last week, according to the U.S. Energy Information Administration (http://tmsnrt.rs/2eCrFWF).

Stocks have increased by less than the five-year average for 25 consecutive weeks, which has eliminated the huge overhang inherited from the warm winter of 2015/16 (http://tmsnrt.rs/2eCqaaV).

But last week's increase was only just short of the 2011-2015 average of 76 billion cubic feet and for the first time since April, supply-demand is no longer tightening (http://tmsnrt.rs/2dSuSO4).

Exceptionally warm weather across much of the continental United States has cut gas consumption for both space heating and by power producers.

Heating demand last week was down by almost two-thirds compared with the same period in 2015, according to the U.S. National Oceanic and Atmospheric Administration.

There were only 24 population-weighted heating degree days last week compared with 64 at the same point last year (http://tmsnrt.rs/2eCuCGO).

The resulting slump in gas consumption explains why prices have tumbled after rising strongly throughout most of September and October ("U.S. gas prices slump as warm weather persists", Reuters, Oct. 27).

But while the warm weather has cut short-term gas demand, the structural supply-demand balance still appears to be tightening.

Careful analysis reveals that gas stockpiles are rising much more slowly than in 2015 for any given level of heating demand (http://tmsnrt.rs/2dSu2k4).

Heating demand last week was down by almost 63 percent compared with 2015 but gas stocks rose last week (73 bcf) by only a little more than 2015 (67 bcf).

The increasing number of combined-cycle gas-fired power plants which have been built is increasing the structural demand for gas.

Low gas prices have encouraged power producers to run them for more hours at the expense of coal-fired generating units ("U.S. power producers maximise gas burn at the expense of coal", Reuters, Aug. 31).

At the same time, gas production has been falling year on year since April as a result of low gas prices and the sharp drop in drilling new gas wells.

The gas market is caught between the need for lower prices to counter the short-term impact of warm weather by stimulating more gas consumption by power producers and higher prices to redress the structural imbalance.

The tension is being resolved by heavy discounting of gas for consumption in the near term coupled with more resilience in prices for gas next summer.

The premium for gas delivered in January 2017 compared with July 2017 has weakened from 34 cents to 12 cents over the last 15 days.

The market is trying to discover a structure of prices that will limit the short-term build-up of stocks while avoiding shortages in 2017.

The added complication is that both structural supply and demand are now responding to the earlier increase in prices during the summer and early autumn.

The number of rigs drilling for gas has risen by 27 or a third since the end of August in response to higher gas prices ("U.S. oil and gas producers stir from hibernation", Reuters, Oct. 24).

The number of rigs drilling for oil is up by 149 or 37 percent since late May, which will add extra volumes of associated gas to the market.

And the previous increase in gas prices will probably encourage power producers to reduce the number of hours they run combined-cycle plants and increase the number of hours run at coal-fired power plants this winter.

These cross-currents have complicated the outlook for the supply-demand balance and prices and left the market less sure about the future direction.

By John Kemp