07 October 2016, London — Deferred U.S. natural gas prices have risen to their highest level for more than a year as the market rebalances and starts to anticipate a possible deficit in 2017.
The price for gas delivered to Henry Hub in July 2017, the height of the air
conditioning season rose earlier on Friday to $3.147 per million British thermal units, the highest since July-August 2015.
Futures prices for July 2017 have increased by almost 31 percent since hitting a low of just $2.41 in late February.
The reasons are not hard to find as the market has digested the surplus left over from last year and starts to focus on the possibility of shortfalls next year.
Domestic gas production has been turning down since March as low prices have cut the number of rigs drilling gas-rich formations to less than 100 across the entire country.
At the same time, gas consumption has been surging as exceptionally high temperatures all summer long have coupled with cheap gas prices to encourage record gas burn by power producers.
The result is that gas stocks have risen by less than the five-year seasonal average for 22 consecutive weeks, according to data from the U.S. Energy Information Administration (tmsnrt.rs/2dAqnu1).
Consistently below-average stock builds throughout the injection season have gradually whittled away the huge surplus of gas left over from the record warm winter of 2015/16.
Gas stocks are now just 46 billion cubic feet or 1.3 percent higher than at the same point in 2015 and 103 billion cubic feet or 2.9 percent above the five-year seasonal average.
Back in March, stocks were more than 1,000 billion cubic feet or 69 percent above 2015 and 836 billion cubic feet or 47 percent above the five-year average.
The unusual run of warmer than normal temperatures since the end of May has played an important role in working off excess gas stocks.
But a careful analysis of the data shows gas consumption (net of production) has been higher than in 2015 for any given level of air conditioning demand.
The growing fleet of super-efficient combined cycle gas-fired power stations has burned its way through a record volume of gas this summer.
Low gas prices have encouraged the owners of gas-fired power stations to run them for a record number of hours so far in 2016.
Gas-fired combined cycle plants have increasingly replaced coal-fired power stations providing baseload power to the grid (“New wave of power plants is fuelling U.S. gas demand”, Reuters, Oct 4).
The summer cooling season is now (effectively) finished and the primary weather-related demand for gas switches to space heating.
Temperatures remained well above normal throughout September and are forecast to remain above average through much of October.
So far this heating season, heating demand has been almost 70 percent lower than usual and 60 percent lower than in 2015.
With the switch from cooling to heating, higher temperatures are now likely to cut gas consumption and are a bearish factor for gas prices, other things being equal.
Winter & Beyond
So far, the unseasonably warm temperatures have not stopped gas futures prices from increasing sharply.
In part, this is probably because a warmer-than-normal start to the heating season has been predicted for several months by the U.S. National Oceanic and Atmospheric Administration.
NOAA’s seasonal forecasts are based on large-scale atmospheric and oceanic circulations that change only relatively slowly and somewhat predictably.
The agency has been forecasting for some time that September, October, and November would be warmer than average across much of the United States.
There is more uncertainty about the temperature outlook during the peak of the heating season between December and February.
The uncertainty has arisen because La Nina conditions have failed to develop as strongly and quickly as previously predicted (“La Nina forecast downgraded as trade winds remain moderate”, Reuters, Sep 21).
However, a number of other oceanic and atmospheric circulations, not directly linked to El Nino/La Nina indicate the coming winter could be a cold one (“Return of the blob: U.S. gearing up for cold winter?” Reuters, Oct 4).
In any event, the normal statistical variability in winter temperatures strongly suggests the winter of 2016/17 is unlikely to be as warm as the record winter of 2015/16.
Gas consumption for both space heating and power production this winter is, therefore, likely to be higher than last winter.
Underlying demand for gas remains strong: power producers are still consuming unusually large amounts of gas owing to its low price relative to coal.
And gas production still appears to be falling. There has been little upturn in drilling for gas despite a big increase in the number of rigs drilling wells for oil since May.
The prospect of a structurally tighter supply-demand balance in 2017 likely explains why prices have continued to firm despite the warm start to autumn and uncertainty about the outlook for winter.
*John Kemp; Editing – William Hardy – Reuters