John Kemp, Reuters

Benchmark U.S. natural gas prices have remained stuck below $3 per million British thermal units for most of this year even as consumption has soared and gas stocks have slipped to their lowest seasonal levels since 2003.

Working stocks in underground storage amounted to just 2,636 billion cubic feet (Bcf) at the end of the first week in September, down from 3,298 Bcf at the same point last year and a five-year average of 3,232 Bcf.

Gas consumption by power producers has risen strongly as a result of high air-conditioning demand during a long, hot summer and the commissioning of another wave of combined-cycle generating units.

Cooling demand has been more than 13% higher than in 2017 and 14% above the long-term average so far in 2018.

Cumulative demand has been similar to the heatwave of 2016, according to degree-day statistics from the U.S. Climate Prediction Center.

Power producers’ gas consumption is also being boosted by the large number of new gas-fired generating units that have started up. Power producers had 464 gigawatts of gas-fired generating capacity available at the end of June, up 3% compared with 2017.

And low gas prices have encouraged power producers to run them for more hours, with capacity utilization rates several percentage points higher every month so far in 2018 compared with 2017.

Much of the increase in gas-fired generation has come at the expense of coal, where capacity has declined by more than 6% from year-ago levels and utilization rates have been down in most months so far in 2018.

Power producers generated almost 16% more electricity from gas in the first six months of the year while coal-fired generation was down almost 6%. As a result, power producers consumed an extra 650 Bcf (16%) of gas in the first half of 2018 compared with 2017.

Natural gas exports also rose, by 126 Bcf, in the first half as new pipelines opened to Mexico and LNG terminals ramped up.


Despite the enormous increase in consumption and exports, domestic production has been rising even faster, keeping prices low.

Natural gas production (excluding liquids) surged by 1,413 Bcf in the first half of 2018 compared with the same period in 2017.

The super-abundance of domestic gas production, coupled with the growing volume of exports and the increased use of gas in the power sector, is fundamentally altering the relationship between stocks and prices.

Gas traders now anticipate a large potential increase in inventories during the shoulder season after summer air-conditioning demand ends and before winter heating demand picks up.

To ensure there is enough storage availability, gas prices remained low over the summer to encourage power producers to maximize gas consumption, keeping stocks much lower than in recent years.

And to limit the increase when it comes in the next few weeks, gas prices have to remain low to continue incentivizing high power burn during the shoulder season.

Low prices are also curbing new drilling, with the number of rigs targeting predominantly gas-bearing formations down to 186 last week, from a peak of 200 in mid-May, after rising steadily for the last two years.

Because production is now so plentiful, the market is comfortable carrying lower inventories over the summer months.

The calendar strip of futures prices for 2019 remains stuck well below $3 per million BTUs, a sign supplies are expected to remain plentiful, notwithstanding strong consumption growth and relatively low inventories.

Most traders see little prospect of a sustained rise in gas prices. Hedge fund managers hold a net long position in natural gas futures and options equivalent to 1,336 Bcf, down from 2,223 Bcf on Aug. 21.

Fund managers’ long positions outnumber short ones by a ratio of just 2:1, down from recent highs of 4:1 at the end of January and 5:1 in May 2017.