REUTERS

U.S. natural gas market rebalancing well underway: Kemp

COMMODITIES | Fri Sep 16, 2016 | 9:23am EDT
By John Kemp | LONDON


The U.S. natural gas market is well on the way to rebalancing as unusually high
airconditioning demand coupled with strong underlying consumption growth absorbs the
record inventories left at the end of last winter.


Anticipating a tighter market in 2017, hedge funds and other money managers amassed
the largest net long position in natural gas futures and options for more than two years
by the end of August.


Despite some recent profit-taking and fresh short selling, the hedge funds’ net long
position in natural gas futures and options on Sept. 6 remained at the highest since July
2014.


U.S. working gas stocks in underground storage rose by 62 billion cubic feet to 3,499
billion cubic feet in the week ending on Sept. 9, according to the U.S. Energy
Information Administration.


The stock build was the largest for nine weeks but impacted by reduced demand owing
to the closure of many businesses for Labor Day.


Despite the holiday, stocks rose by less than the five-year average of 69 billion cubic
feet, the 19th consecutive below-average weekly increase.


Below-average builds have gradually whittled away the enormous surplus of natural gas
left in storage as a result of the warm winter of 2015/16.


Stocks are still around 160 billion cubic feet, 5 percent, higher than at the corresponding
point in 2015, but the surplus has shrunk from a peak of 1,014 billion cubic feet, 69
percent, back in March.


Stocks are also 299 billion cubic feet, 9 percent, above the five-year seasonal average,
but the surplus has shrunk more or less continuously from 874 billion cubic feet, 54
percent, at the start of April.


Gas consumption by power producers has been supported by strong airconditioning
demand, with temperatures well above average in the major population centers almost
continuously since late May.


The number of population-weighted cooling degree days, one measure of
airconditioning demand, has been above the long-term average nearly continuously
since the last week of May.


The number of population-weighted cooling degree days so far this year has been 6
percent higher than at the corresponding point in 2015 and 14 percent above the longrun
average.


But rebalancing is not just about unusual summer heat. Gas stocks have been rising
more slowly this summer than in 2015 for any given level of airconditioning demand.


Low gas prices are encouraging power producers to burn gas rather than coal while the
low level of gas-directed drilling has caused gas production to start edging down.


Many analysts point out that gas stocks are still at an exceptionally high level for the
time of year but that is the result of the surplus inherited from winter 2015/2016.


Recent trends in both production and consumption suggest the rebalancing process is
advanced and should be completed within the next 6-8 weeks.


WINTER OUTLOOK
Population-weighted cooling demand remained above average this week, according to
the National Oceanic and Atmospheric Administration’s Climate Prediction Center.


And temperatures are forecast to remain above normal in the most populous parts of
the country for at least the next fortnight, according to NOAA.


The result is that gas stocks are likely to continue rising by less than the five-year
average throughout the rest of September, which will whittle down the surplus even
further.


The longer-term winter outlook remains unsettled at this point. The strong El Nino which
characterized winter 2015/16 has dissipated but the La Nina phase of the cycle is
developing more slowly than expected.


U.S. government forecasters have reduced the probability of La Nina during the
northern hemisphere winter (December through February) to just 36 percent, down from
76 percent at the time of their May forecast.


The U.S. government now thinks it is more likely conditions in the central and eastern
Pacific will be neutral (56 percent probability) rather than exhibiting La Nina.


Downgraded prospects for La Nina will likely cause some revisions to the outlook for
temperatures and heating demand during winter 2016/17.


But the key point is that the winter of 2016/17 is very unlikely to be as mild as the winter
of 2015/16, which was the warmest on record.


TIGHTER MARKET
Gas stocks are likely to enter the winter reasonably close to the long-term average and
underlying gas demand is growing as more gas-fired power plants enter service and the
existing fleet operates for more hours.


The most likely outcome is a progressive tightening of the gas market during winter
2016/17 and throughout the remainder of 2017.


Prospective market tightening has already been reflected in a steady tightening in the
spread between the prices for gas delivered in October 2016 and March 2017.


The discount for October futures has shrunk from 62 cents per million British thermal
units at the end of May to less than 34 cents earlier this week as fears about storage
capacity running out have eased.


Prices for gas delivered in October have risen by around 45 cents per million British
thermal units, 19 percent, since late May in a bid to moderate discretionary gas burn by
power producers and conserve stocks.


(John Kemp is a Reuters market analyst. The views expressed are his own.)

(Editing by William Hardy)


FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND
MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES
MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY
RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT
IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE
RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL
DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED
IN THE PRICE OF THE UNDERLYING FUTURES.