John Kemp is a Reuters market analyst. The views expressed are his own
By John Kemp
LONDON, Sept 16 (Reuters) - 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 (http://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 Administration (http://tmsnrt.rs/2cOvwR6).
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 (http://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 (http://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 (http://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 (http://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 (http://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 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 (http://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.
Senior Market Analyst