COLUMN-U.S. natural gas prices remain on defensive despite low stocks: Kemp
(Repeats Sept. 19 column. John Kemp is a Reuters market
analyst. The views expressed are his own)
* Chartbook: https://tmsnrt.rs/2pmzdBb
By John Kemp
LONDON, Sept 19 (Reuters) - Benchmark U.S. natural gas
prices have remained stuck below $3 per million British thermal
units for most of this year even as consumption has soared and
gas stocks have slipped to their lowest seasonal levels since
Working stocks in underground storage amounted to just 2,636
billion cubic feet at the end of the first week in September,
down from 3,298 bcf at the same point last year and a five-year
average of 3,232 bcf.
Gas consumption by power producers has risen strongly as a
result of high air-conditioning demand during a long, hot summer
and the commissioning of another wave of combined-cycle
Cooling demand has been more than 13 percent higher than in
2017 and 14 percent above the long-term average so far in 2018
Cumulative demand has been similar to the heatwave of 2016,
according to degree-day statistics from the U.S. Climate
Power producers’ gas consumption is also being boosted by
the large number of new gas-fired generating units that have
Power producers had 464 gigawatts of gas-fired generating
capacity available at the end of June, up 3 percent compared
And low gas prices have encouraged power producers to run
them for more hours, with capacity utilisation rates several
percentage points higher every month so far in 2018 compared
Much of the increase in gas-fired generation has come at the
expense of coal, where capacity has declined by more than 6
percent from year-ago levels and utilisation rates have been
down in most months so far in 2018.
Power producers generated almost 16 percent more electricity
from gas in the first six months of the year while coal-fired
generation was down almost 6 percent (“Electric Power Monthly”,
Energy Information Administration, August 2018).
As a result, power producers consumed an extra 650 bcf (16
percent) of gas in the first half of 2018 compared with 2017.
Natural gas exports also rose, by 126 bcf, in the first half
as new pipelines opened to Mexico and LNG terminals ramped up.
Despite the enormous increase in consumption and exports,
domestic production has been rising even faster, keeping prices
Natural gas production (excluding liquids) surged by 1,413
bcf in the first half of 2018 compared with the same period in
2017 (“Natural Gas Monthly”, EIA, August 2018).
The super-abundance of domestic gas production, coupled with
the growing volume of exports and the increased use of gas in
the power sector, is fundamentally altering the relationship
between stocks and prices.
Gas traders now anticipate a large potential increase in
inventories during the shoulder season after summer
air-conditioning demand ends and before winter heating demand
To ensure there is enough storage availability, gas prices
remained low over the summer to encourage power producers to
maximise gas consumption, keeping stocks much lower than in
And to limit the increase when it comes in the next few
weeks, gas prices have to remain low to continue incentivising
high power burn during the shoulder season.
Low prices are also curbing new drilling, with the number of
rigs targeting predominantly gas-bearing formations down to 186
last week, from a peak of 200 in mid-May, after rising steadily
for the last two years.
Because production is now so plentiful, the market is
comfortable carrying lower inventories over the summer months.
The calendar strip of futures prices for 2019 remains stuck
well below $3 per million BTUs, a sign supplies are expected to
remain plentiful, notwithstanding strong consumption growth and
relatively low inventories.
Most traders see little prospect of a sustained rise in gas
prices. Hedge fund managers hold a net long position in natural
gas futures and options equivalent to 1,336 bcf, down from 2,223
bcf on Aug. 21.
Fund managers’ long positions outnumber short ones by a
ratio of just 2:1, down from recent highs of 4:1 at the end of
January and 5:1 in May 2017.
- U.S. natural gas bears caught by return of winter
(Reuters, Jan. 23)
(Editing by Dale Hudson)
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