The end is nigh
US power sector demand for natural gas is soaring. The glut could be about to end
A steaming hot summer has sent the US power sector's demand for natural gas to record levels, helping to draw down bulging stocks. Last year, gas overtook coal as the country's top fuel for power generation. On 21 July, consumption reached its highest ever daily level, at 40.9bn cubic feet per day. It might be a sign of things to come. Changing weather patterns will also drive US gas consumption higher throughout the coming winter months. El Niño periods have typically been bearish for gas prices because they bring warmer winters to the north and wetter rainy seasons in the west. But la Niña, which follows, usually brings hotter summers in the north. More air conditioning, plus stormier hurricane seasons that threaten supply disruption, followed by colder winters: it's a combination that spells good news for anyone selling natural gas.
And as gas demand from the power sector has increased, stocks have drawn down. By the end of July, US natural gas inventories were posting their first net summer-time withdrawal in 10 years. For the week ending 3 August, said the Energy Information Administration, US gas stocks stood at 3.29bn cf. That's 464bn cf above the five-year average and 389bn cf above last year at this time. But a draw was a draw-and this was the first for that period since 2006.
Lower gas production has also helped shift some of the balance. Total dry gas out-put averaged 2.26 trillion cf in May (around 75.33m cf/d), down from 2.32 trillion cf in August 2015 (around 77.35m cf/d).
Gas prices have already started to respond to higher demand and falling stocks. By mid-June, the Henry Hub benchmark had risen from its late winter lows of less than $2 per million British thermal units to $2.55/m Btu, its highest level in more than six months. Since then front-month futures have rallied further, trading around $2.64/m Btu in mid-August.
The forward curve is looking even better for US gas producers. Henry Hub prices for delivery in January 2017 were trading at $3.25/m Btu by mid-August.