Kemp: US gas surplus likely to be eliminated before winter ends

[cmm3rd]

From John Kemp:

U.S. gas surplus likely to be eliminated before winter ends

U.S. gas production is turning down in response to lower prices and less drilling, eroding excess inventories inherited from last year’s very mild winter and lifting prices from their record lows earlier this year.

Dry gas production averaged 102.1 billion cubic feet per day (bcf/d) in September down from 104.4 bcf/d in the same month a year earlier, according to data from the U.S. Energy Information Administration (EIA).

The decline was the largest since the coronavirus pandemic ravaged production and consumption in 2020 and before that the last major price slump in 2016.

Producers have cut drilling for new wells and delayed completions or choked output from existing ones in response to the collapse in prices to multi-decade lows earlier this year.

Front-month futures prices averaged well under $2 per million British thermal units in March, the lowest since trading began in 1990 after adjusting for inflation.

Prices actually paid by electricity generators declined to the lowest for at least 50 years in real terms, well below the cost of coal once efficiency differences between gas-fired and coal units are taken into account.

Chartbook: U.S. gas production, consumption and stocks

U.S. generators have reacted by maximising gas-fired production to take advantage of the ultra-low fuel prices, mostly at the expense of coal.

Gas generators produced a record 1,267 billion kilowatt-hours (kWh) in the first eight months of 2024 up from 1,214 billion kWh in the same period a year earlier.

Gas units boosted their share of total power production to a record high of 43.3% up from 43.0% in 2023 and 39.1% in 2022.

Gas generation remained unusually high in September, October and November, according to provisional data from electric reliability coordinators.

At the same time, gas exports have remained strong, despite well-publicised problems at some liquefaction terminals.

Total exports by pipeline and tanker averaged 20.8 bcf/d in the first eight months of 2024 up from 20.4 bcf/d in the same period in 2023 and 19.2 bcf/d in 2022.

SURPLUS IS CLEARING

The production downturn coupled with increases in gas use by generators and exports has depleted some the excess stocks carried over at the end of the exceptionally mild winter of 2023/24.

Working gas inventories in underground storage were still 171 bcf (+5% or +0.69 standard deviations) above the prior ten-year seasonal average on October 12.

But the surplus had narrowed sharply from 634 bcf (+39% or +1.36 standard deviations) at the end of winter 2023/24.

As the surplus has narrowed, prices have climbed; by November, front-month prices had risen by an average of more than $1 per million British thermal units (+68%) from their March low.

Even so, average front-month prices were still very low, in only the 11th percentile for all months since 1990 after allowing for inflation.

In November, unusually mild weather cut seasonal gas consumption, and caused the surplus to widen again temporarily, arresting the rise in prices.

In contrast to Northwest Europe, where winter has begun much colder than normal, the Lower 48 states have so far had the mildest start to the winter for eight years.

But the combination of falling production, rising consumption by power generators, and growing exports implies the surplus will very likely shrink again even if winter temperatures remain close to the recent average.

Surplus inventories are likely to be eliminated by the end of winter 2024/25 - at which point prices will have to increase to encourage more production in order to satisfy the growing demand from generators and exporters.

Related newsletters:
- Europe’s gas storage empties at fastest rate since 2016 (November 29, 2024)
- U.S. electricity generators binge on ultra-cheap gas (October 11, 2024)
- U.S. oil and gas output squeezed by lower prices (October 1, 2024)
- U.S. oil and gas output growth slows after prices retreat (September 5, 2024)

[dan_s]

It will be a three-step process:
1. Normal winter in the eastern US
2. US LNG exports at capacity in Q1 2025
3. Increasing demand for electricity from natural gas fired power plants.

Big upside for SEI regardless of the gas price.

All of the Sweet 16 produce a lot of natural gas and NGLs.