U.S. natural gas prices have surged after last year’s slump, which will limit gas consumption over the summer by electricity generators and encourage a switch to more coal combustion.
Compared with a year ago, front-month futures prices for gas delivered at Henry Hub have risen to $3.00 per million British thermal units, an increase of almost 80%.
Gas has again become more expensive than coal, after adjusting for efficiency differences, encouraging power producers to run gas-fired units for fewer hours and leave more of the market for coal-fired alternatives.
Gas units are forecast to provide 37% of total generation this summer, down from 42% last year, the U.S. Energy Information Administration (EIA) said.
By contrast, coal units are expected to boost their generation share to 26%, up from 22% in 2020 (“EIA forecasts less natural gas-fired generation this summer”, EIA, May 12).
EIA forecasts electricity generators will burn an average of 35 billion cubic feet (bcf) of gas per day in the three months between June and August, down from 40 bcf per day in the same period last year.
But coal combustion is predicted to rise to 160 million short tons, up from 137 million short tons in the same three months last year (“Short-term energy outlook”, EIA, May 6).
GAS STOCKS NORMALISE
In response to a big build up in gas stocks last year during the epidemic, ultra-low prices curbed drilling of new gas wells and helped tighten the market in the second half of 2020.
Then, after a warm start to the winter, temperatures dropped well below normal in February, with freezing weather in Texas, eliminating the remaining gas surplus.
Last week, gas inventories were 3% below the prior five-year seasonal average, down from a surplus of 18% in June 2020 (https://tmsnrt.rs/2SFq0pl).
As a result, futures prices have risen to the 78th percentile of the 2016-2020 five-year average to discourage any further erosion of inventories and incentivise more well drilling.
The number of rigs drilling for gas rose last week to 103, up from a low of 68 at the end of July, and the highest since before the first wave of novel coronavirus in March 2020.
Nonetheless, hedge funds and other money managers are running a large net long position in gas futures and options, regulatory reports find.
Most managers anticipate prices will have to rise further to restrain power generators’ consumption during any period of sustained hot weather this summer.
Portfolio managers hold a combined net long position equivalent to 2,200 billion cubic feet, down from a peak of 3,500 billion three months ago, but up from 1,600 billion this time last year.
And bullish long positions outnumber bearish short ones by a ratio of almost 2.3:1, which is in the 74th percentile for all weeks since 2013.
Gas inventories have returned to normal following the epidemic; now prices are relatively high to discourage power burn and ensure they do not fall any further.
– U.S. gas stocks and prices normalise after cold snap (Reuters, March 16) read more
– Big freeze rebalances U.S. gas market (Reuters, Feb. 26) read more
– U.S. gas market tightens despite mild winter (Reuters, Jan. 26) read more
– U.S. gas market rebalances after low prices curb glut (Reuters, Nov. 17)
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