The U.S. gas market has tightened significantly over the last nine months as low prices have spurred strong consumption and exports while slashing drilling of new wells.

The market has rebalanced despite an unusually mild winter so far, which points to the degree of underlying tightness and suggests prices will need to remain higher in 2017 than they were in 2016 to avoid a shortage.

At the half-way point in the current winter heating season, working gas stocks in underground storage are 77 billion cubic feet (3 percent) below the five-year average.

At the same point last year, stocks were 473 billion cubic feet (17 percent) above average, according to the U.S. Energy Information Administration

The storage surplus continued growing until it peaked at 874 billion cubic feet (54 percent) at the start of April 2016 (tmsnrt.rs/2jGzkGy).

Since then, however, the surplus has shrunk thanks to a slowdown in gas drilling and record consumption by power producers during the summer of 2016.

The surplus continued to narrow during the winter of 2016/17, and by the end of the year had turned into a deficit, despite the fact that temperatures have mostly been warmer than normal.

Heating demand so far in the winter of 2016/17 has been around 2 percent higher than in 2015/16 but is still 15 percent below the long-term average, according to the National Oceanic and Atmospheric Administration.

Nonetheless, gas stockpiles have been drawing down faster than last winter for any given level of heating demand (tmsnrt.rs/2j1wquV).

In the week ending Jan. 13, 2017, there were 214 population-weighted heating degree days and gas stocks fell by 243 billion cubic feet.

In the week ending Jan. 22, 2016, there were also 214 population-weighted degree days but stocks fell by just 211 billion cubic feet.

So the underlying supply-demand balance had shifted by around 4.1 billion cubic feet per day compared with the same period in 2016.

TIGHTER MARKET

Every element of the supply-demand balance has shifted in the direction of a tighter market over the course of 2016.

Gas production peaked in the summer of 2015 and has been declining year-on-year since March 2016, according to EIA records (tmsnrt.rs/2jwlRP6).

Production in October 2016 (2,191 billion cubic feet) was almost 5 percent lower than in the same month a year earlier (2,298 billion cubic feet).

Gas consumption by power producers has been increasing thanks to a combination of low prices and the commissioning of super-efficient combined cycle gas turbines (CCGTs) (tmsnrt.rs/2j1CxiN).

Electricity generators consumed almost 8 percent more gas in the three months ending in September than in the same period a year earlier.

And gas exports are increasing as a result of the opening of new LNG liquefaction facilities and a favorable arbitrage between low gas prices in the United States and higher gas prices in overseas markets.

Gas exports totaled 200 billion cubic feet in October 2016 compared with just 159 billion cubic feet in October 2015 and 115 billion cubic feet in October 2014 (tmsnrt.rs/2j1qzpi).

Bitterly cold weather across Europe and Asia in December and January has encouraged strong exports to continue.

Low gas prices have therefore eliminated the surplus left at the end of the mild winter of 2015/16 through a combination of lower production, higher consumption and higher exports.

Prices were bound to rise from the low levels reported in the first half of 2016 as the market rebalanced and to prevent a surplus from becoming a deficit.

But benchmark futures prices have already doubled from a low of around $1.60 per million British thermal units at the start of March 2016 to around $3.30 in recent trading.

Drilling has begun to pick up with the number of active rigs targeting gas-bearing formations up by 65 percent since the end of August and now basically at the same level as a year ago.

The rise in prices will also encourage power producers to run their CCGTs for fewer hours in 2017 and use coal-fired units more often (“New wave of power plants is fuelling U.S. gas demand”, Reuters, Oct. 4).

The question is whether prices have already risen enough to stem the shift toward a big storage deficit in the second half of 2017 or will need to rise further.

Source: www.reuters.com