Working stocks in underground storage have fallen by 1,703 billion cubic feet since the start of November, according to data from the U.S. Energy Information Administration.
The depletion rate has been the fastest since the winter of 2017/18 and is significantly above the pre-pandemic five-year average of 1,485 billion cubic feet (“Weekly natural gas storage report”, EIA, Feb. 17).
Inventories are now 289 billion cubic feet (13%) below the pre-pandemic seasonal average, compared with 103 billion cubic feet (3%) below the average at the start of November.
Inventories have depleted rapidly even though the winter has been significantly warmer-than-average across the major population centres of the United States, cutting heating demand.
The number of population-weighted heating degree days has been 10% below the long-term average, according to the U.S. Climate Prediction Center (https://tmsnrt.rs/3uWpc0B).
Despite the rapid inventory depletion, traders now anticipate they will remain adequate through the end of the main heating season, based on futures prices.
The end-of-winter March-April calendar spread is currently trading at around 5 cents per million British thermal units, down from $1.80 in early October, when there were fears stocks might fall to critically low levels.
Gas inventories will nevertheless end winter below average across North America and Europe, even assuming pipeline supplies from Russia keep flowing.
High levels of injections will be needed to refill depleted storage on both sides of the Atlantic while still meeting strong demand from Asia.
To rebuild depleted inventories, U.S. gas production will need to keep increasing while consumption will have to be restrained through the spring and summer months, which should keep prices relatively high.
Front-month futures prices have fallen around a quarter from their recent high in September 2020, but are still slightly above the average in real terms, in the 55th percentile since 1990.
On the consumption side, power generators are paying twice as much for gas than coal on an energy-equivalent basis, more than offsetting the superior efficiency of many gas-fired units.
High gas prices will continue to give generators an incentive to run gas units for fewer hours, using coal-fired ones instead, helping rebuild gas stocks.
On the production side, the number of drilling rigs targeting primarily gas-bearing rock formations climbed last week to 124, up from 90 at the same point last year, and the highest since before the pandemic.
And the number of rigs targeting primarily oil-bearing formations has risen even faster to 520, up from 306 this time last year, which will also boost output of associated gas from oil wells.
Production has started rising again and was up more than 5% in the three months from September to November last year compared with the year before.
North America, Europe and Asia have avoided feared shortages of gas this winter, mostly as a result of mild temperatures across the northern hemisphere.
But the scarcity of gas has not disappeared fully and there will need to be an unusually large accumulation of inventories between April and September to ensure next winter does not start with a shortfall.
Rebuilding depleted inventories will therefore be the dominant theme in global gas market and by extension the coal and electricity markets over the next six months.
Hedge funds and other money managers are still bullish on U.S. gas prices, with a net long position in the two main futures and options contracts equivalent to 1,885 billion cubic feet, which is in the 65th percentile since 2010.
Bullish long positions outnumber bearish short ones by a ratio of more than 2:1, in the 69th percentile since 2010, anticipating prices will have to rise again to rebuild inventories before winter 2022/23.
John Kemp is a Reuters market analyst. The views expressed are his own