COLUMN John Kemp - Reuters News: Heatwaves and low prices tighten U.S. gas market

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COLUMN-Heatwaves and low prices tighten U.S. gas market: Kemp - Reuters News

10-Aug-2016 14:47:46

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

By John Kemp

LONDON, Aug 10 (Reuters) - Unusually hot weather coupled with cheap fuel prices caused U.S. power producers to burn a record volume of gas last month to meet soaring demand for electricity for airconditioning.

April and May were cooler than normal across the continental United States, depressing airconditioning demand, but June and July were both much hotter than usual (http://tmsnrt.rs/2b80Jhx and http://tmsnrt.rs/2b80CSY).

The result is that power producers’ gas consumption has surged during June and July and the volume of gas put into storage has been much lower than usual for the time of year (http://tmsnrt.rs/2b815Vh).

The particularly intense heatwave during the second half of July sent daily gas burn surging to a record and resulted in a highly unusual summer-time drawdown in gas stocks in the week ending on July 29.

Over the last week, temperatures have been close to normal. But another heatwave is starting and is expected to persist through the rest of the week, driving up gas consumption again (http://tmsnrt.rs/2b3cp0P).

According to the U.S. Energy Information Administration, U.S. power producers generated 4,950 gigawatt-hours from gas-fired units in July, an increase of 9 percent from the previous record set in July 2015.

Power plants consumed an estimated 36.8 billion cubic feet of gas per day in July, up 8 percent compared with the same month in 2015 (“Short-Term Energy Outlook”, EIA, Aug 2016).

The record gas burn reflects a combination of a structural shift (coal-fired power stations are being phased out in favour of cleaner burning gas units), weather (temperatures were well above normal in June and July) and fuel prices (gas is currently competitive with other sources of generation).

Gas-fired generation has been increasing since the late 1980s because gas units are quicker and cheaper to build, offer more operational flexibility, and have fewer environmental problems.

Gas-fired plants accounted for almost 33 percent of all utility-scale power production in 2015, up from 28 percent in 2014 and 20 percent in 2006, according to the Energy Information Administration.

Because of their greater operational flexibility, gas-fired plants are used to meet marginal electricity demand in summer when consumption peaks as temperatures rise and airconditioners crank up.

In most years, electricity consumption peaks in July or August, when temperatures are normally highest, and July and August are also the months when power producers burn most gas.

Power producers’ gas combustion is therefore closely tied to average temperatures and July 2016 was one of the hottest on record (http://tmsnrt.rs/2b3bYnn).

Low fuel prices accelerated the shift towards gas during the first half of 2016.

For much of the first half of the year, gas prices were among the lowest for more than a decade, encouraging maximum gas use.

Low gas prices have also caused gas production to plateau after strong growth in 2014/15 ("U.S. gas prices must rise to rebalance the market", Reuters, Jul 15).

Record gas combustion by power producers has helped draw down the large volume of natural gas stocks which built up during 2015 and the first few months of 2016.

Gas stockpiles remain at a record level for the time of year but have been building more slowly than usual and the year-on-year surplus has been shrinking consistently since April.

Gas stocks are now just 378 billion cubic feet (13 percent) higher than at the corresponding point in 2015, down from a surplus of 1,014 billion cubic feet (69 percent) in March (http://tmsnrt.rs/2biDuOb).

John Kemp

 

Senior Market Analyst

Reuters