COLUMN-U.S. gas prices near record low amid over-production: Kemp


By John Kemp

LONDON, Feb 22 (Reuters) - U.S. gas prices have slumped close to their lowest level on record, after adjusting for inflation, as traders respond to signs of a persistent production surplus in the domestic market.

The front-month futures for gas delivered at Henry Hub in Louisiana have fallen to just $2 per million British thermal units down from more than $9 at the end of August 2022.

In real terms, prices are the lowest on record, except for the period between February and June 2020, when the first wave of the pandemic hit a market already carrying very high inventories.

The front-month contract is now entering the final trading days before expiry so is no longer representative, but the more liquid second-month contract has slumped to just $2.20.

Prices have remained under pressure despite forecasts of another wave of cold weather across the western United States in the next few days and the imminent restart of exports from Freeport LNG.

Chartbook: U.S. gas prices and inventories

The U.S. gas market appears to have been running a persistent surplus since early September 2022, which has sent futures prices tumbling.

Working inventories in underground storage were +77 billion cubic feet (+4% or +0.22 standard deviations) above the prior ten-year seasonal average on February 10.

The storage surplus marked a significant turn around from a deficit of -427 billion cubic feet (-13% or -1.52 standard deviations) on September 9.

The shift to a surplus was only briefly interrupted by periods of exceptionally cold weather in late December 2022 and again at the end of January and in early February 2023.

Inventories depleted by -505 billion cubic feet between September 9 and February 10, the smallest seasonal drawdown for eleven years since the winter of 2011/12.

Depletion so far this heating season has been around half the seasonal average for the last ten years of around -1,000 billion cubic feet.

Prices are sending an increasingly urgent signal to increase consumption by power producers by running gas-fired generating units for more hours at the expense of coal and likely hydro.

Gas has become cheaper to burn than coal - and the advantage is even more pronounced because gas-fired units can start up and ramp down much faster, economising on fuel use.

Coal-fired generators become increasingly uncompetitive when gas is priced under $3.00 per million British thermal units and especially under $2.50.

Gas prices are now sending the strongest possible signal for fuel-switching to blunt the accumulation of excess stocks.

On the production side, drilling for both gas and oil will also have to pull back to reduce the output from gas fields and associated gas from oil-rich formations.

The number of active rigs has shown no net growth since July 2022, according to weekly counts compiled by oilfield services company Baker Hughes.

Drilling is responding to the slump in oil and especially gas prices since the second and third quarters of 2022 but a further slowdown will probably be needed to bring the gas market back to balance.

Related columns:

- U.S. gas prices slump to maximise power burn (Reuters, February 10, 2023)

- U.S. gas prices slump on production surplus (Reuters, January 12, 2023)

John Kemp is a Reuters market analyst. The views expressed are his own

(Editing by Elaine Hardcastle)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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