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)
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