By John Kemp
LONDON, Feb 10 (Reuters) - U.S. gas prices remain stuck
at some of the lowest levels for 30 years (after adjusting for
inflation) in a signal to dial back new well drilling and
maximise combustion by power producers.
Front-month futures closed at $2.45 per million British
thermal units on Feb. 9, in only the second percentile for all
months since 1990, after allowing for the increase in core
consumer prices.
Working inventories in underground storage were 17 billion
cubic feet (+1% or +0.05 standard deviations) above the prior
ten-year average on Feb. 3.
But that was a massive turn around from a deficit of 427
billion cubic feet (-13% or -1.52 standard deviations) as
recently as Sept. 9.
Mild weather has played a relatively small role in erasing
the earlier deficit and transforming it into a large incipient
surplus.
The number of heating degree days across the Lower 48 states
so far this winter has been only 5% below the long-term average.
More important has been loss of exports following the
explosion at Freeport LNG’s terminal and reduced consumption
stemming from high prices through much of 2022.
Chartbook: U.S. gas prices and inventories
Freeport’s eventual reopening should provide an outlet for
some excess inventory, but with stocks in Europe also very full,
exporters will have to compete for price-sensitive customers in
Asia.
Slumping futures prices will discourage drilling and
incentivise electricity generators to run their gas-fired units
for more hours at the expense of coal.
The number of rigs drilling for gas has been essentially
unchanged since the start of September - after increasing by
more than 50 (+50%) in the first eight months of 2022.
Discounted futures prices will also boost combustion from
the power sector, helping limit the accumulation of inventories
this summer.
The summer-winter calendar spread between July 2023 and
January 2024 has slumped into a contango of more than $1.10 per
million British thermal units from a backwardation of more than
50 cents in August 2022.
Gas prices are now trading below the cost of coal, once the
superior efficiency of gas-fired units is taken into account,
which will encourage maximum gas burn this summer.
Related columns:
- Europe’s gas supply stabilises after colder weather
(Reuters, February 3, 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 Mark Potter)
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