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US gas goes from glut to crunch

After years of bloated stocks and low prices US gas supply is about to get much tighter

FOLLOWING years of a glut the US is now heading towards a gas supply crunch because of a lack of new investment in shale projects.

A combination of increasing consumption and depleting stocks will tighten supply and push gas prices higher as the US enters a cold, harsh winter, according to commodities brokerage firm finnCap.

"Due to reduced investment in shale over the past two years, production is now forecast to decline, resulting in higher (gas) prices," finnCap said in a report at the beginning of August. "A mild winter and a hot summer has resulted in a rapidly depleting inventory, and should the US have a cold winter there is scope for a supply crunch."

The country’s Clean Power Plan has helped to boost its use of natural gas in the power sector while phasing out coal.

Last year gas overtook coal as the country’s top fuel for power generation.

This year’s early onset and particularly warm summer has sent demand for natural gas in the power sector soaring.

On 21 July US consumption of natural gas for power generation reached its highest ever daily level, at 40.9bn cubic feet per day (cf/d), according to the Energy Information Administration.

Nine of the 10 highest US power burn days on record occurred in July this year, according to finnCap. The month's average US gas consumption in the power sector was 2.7bn cf/d higher than a year earlier, reaching 36.1bn cf/d. That's 1.5bn cf/d above the previous high set in July 2012, the firm said.

Meanwhile domestic shale gas production has plummeted since the start of the year as capital spending cuts have slashed upstream activity.

Shale gas production in the seven most prolific regions is expected to fall to 45.73bn cf/d in August, down from almost 47m cf/d in March.

Stock drawdown

This has helped to draw down US gas stocks from record highs at the start of the year.

For the week ending 29 July US natural gas inventories posted an overall net withdrawal for the first time in 10 years in the summer months.

At the beginning of August US natural gas stocks drew for the first week during summer since 2006, the EIA said. For the week ending 3 August US gas stocks stood at 3.29bn cf, EIA data show. That’s 464bn cf above the five-year average and 389bn cf above last year at this time.

Changing weather patterns will also drive US gas consumption higher throughout the coming winter months.

El Niño periods were typically bearish for gas prices because they bring warmer winters to the north and wetter rainy seasons in the west. But La Niña usually brings hotter summers in the north, spurring people to switch on the air conditioning, and stormier hurricane seasons that disrupt supplies followed by colder winters.

Gas prices have already started to respond to higher demand and falling stocks. After a prolonged period in the doldrums, Henry Hub prices have started to rise.

Over the past decade, as shale gas production has ramped up, US gas prices have averaged around $4.65 per million British thermal units, down from a high of $13.40/mBtu in 2005.

By mid-June, the Henry Hub benchmark had risen from its late winter lows of less than $2/mBtu to $2.55/mBtu, its highest level in more than six months. At the beginning of August futures had rallied further, trading around $2.59/mBtu.

The forward curve is looking even rosier for US gas producers. Henry Hub prices for delivery in January 2017 were trading just under $3.40/mBtu at the beginning of August. Prices are likely to rise further if expectations of a colder winter come to fruition and stocks deplete further.

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