John Kemp, Reuters

U.S. natural gas stocks look somewhat tight after low prices this summer worked off the excess stocks that built up in the first half of the year.

Current stocks are in line with the five-year seasonal average, but that may not be enough given the increase in exports and the number of additional combined-cycle power plants that have become operational in 2017.

The last two winters have been exceptionally mild; if this winter proves colder, which is likely simply on the basis of probabilities, inventories could come under pressure.

To ration power burn this winter the price of gas for delivery at Henry Hub in January 2018 has already risen by 29 cents per million British thermal units, or 9%, since early August.

Tough Half

U.S. electricity producers sharply curtailed gas consumption in first-half 2017 amid competition from alternative power sources and mild temperatures that cut overall power demand. Consumption fell by 682 Bcf, or 14%, compared with the same period in 2016, according to the U.S. Energy Information Administration.

As a result electricity producers generated almost 95,000 gigawatt-hours (GWh) less from gas between January and June compared with 2016. Losses were due in roughly equal measure to a downturn in electricity demand and increased generation from each of renewables, hydro and coal.

Total electricity demand declined by 31,000 GWh mainly because of a mild end to winter which reduced heading load.

First-half heating demand was almost 11% lower when weighted for the share of homes in each region relying on electricity for space heating.

But solar and wind producers also increased their output by another 28,000 GWh, which mostly displaced gas-fired generation. And hydropower generation climbed by 24,000 GWh, mainly from California, after the state experienced exceptionally heavy snow during the winter of 2016-2017.

California experienced the heaviest snowfall since 1995, leaving the snowpack 85% higher than average, according to the California Department of Water Resources. California’s hydro output rose by almost 11,000 GWh, or 75%, in the first six months due to increased run-off and higher reservoir levels, again mostly at the expense of gas-fired generation.

Washington state’s hydro output also increased by 6,000 GWh, or 14%, in the first six months.

Finally, gas-fired generators were hit by increased competition from coal after gas prices rose sharply at the end of 2016 and in the first five months of 2017.

Coal-fired power plants generated an additional 27,000 GWh between January and June as costlier gas encouraged utilities to run coal units for more hours. In March, for example, coal plants produced about 45% of their theoretical maximum electrical output compared with just 36% in the same month a year earlier.

Summer Burn

Reduced gas consumption caused stocks to rise significantly relative to the five-year average, despite a big increase in gas exports.

Gas exports increased by 477 Bcf, or 44%, in the first half compared with the same period in 2016.

By the end of April working gas stocks in underground storage were 366 Bcf, or almost 16% higher than the five-year average. In response, gas prices fell sharply between May and August to buy back some power burn from coal-fired generation.

Hedge funds, which had been strongly bullish towards gas prices during the first five months of the year, turned increasingly bearish over the summer, intensifying the drop in prices. With gas futures prices below $3 per million British thermal units for most of the summer, power burn appears to have increased during the third quarter, although detailed data have not been published yet.

Gas stocks built more slowly than average during July and August, reversing the previous trend, after building more quickly earlier in 2017.

By the end of August gas stocks had re-connected with the five-year average, principally owing to heightened power burn coupled with continued exports.

Hurricane Hit

Hurricanes Harvey and Irma caused extensive damage to electricity transmission and distribution networks in Texas and Florida.

The result was a significant loss of power demand and a rise in gas stocks. Disruption of petrochemical production in Texas and Louisiana has also added to the increase in gas inventories since the start of September.

But the rise in stocks is likely to prove temporary as electrical connections are restored throughout the region and petrochemical plants return to normal operations.

Now that excess stocks inherited from earlier this year have been worked down, the outlook for gas this winter appears somewhat tight and forward prices are rising as a result.