(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON, Sept 16 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
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 (tmsnrt.rs/2cOxu47).
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
The stock build was the largest for nine weeks but impacted
by reduced demand owing to the closure of many businesses for
Despite the holiday, stocks rose by less than the five-year
average of 69 billion cubic feet, the 19th consecutive
below-average weekly increase (tmsnrt.rs/2cvTdLI).
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 (tmsnrt.rs/2cOvWY0).
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 centres 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 long-run average (tmsnrt.rs/2cvTAWr).
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 (tmsnrt.rs/2cOwNYr).
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.
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 characterised 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 (tmsnrt.rs/2cvTyxT).
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
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 (tmsnrt.rs/2cvTyh9).
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.
(Editing by William Hardy)