US gas ‘glut’ disappearing

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

US natural gas prices have risen by a third since hitting a twodecade low in the first quarter, amid signs supply and demand are rebalancing and excess stocks left over from an unusually warm winter are being worked down.

The volume of gas in working storage hit a record 4.01 trillion cubic feet in November 2015 and is still at 3.18 trillion cubic feet, according to the US Energy Information Administration.

Gas stocks are 513 billion cubic feet (19 percent) higher than in the same week in 2015. But the build has shrunk steadily from a record 1.014 trillion cubic feet (69 percent) in March.

In response to the earlier slide in prices, the number of rigs drilling for oil and gas across the United States has fallen to the lowest level since World War Two. By the start of June 2016, there were just 82 rigs drilling for gas, down from over 300 in June 2014, according to services company Baker Hughes.

Output from the unusually productive wells drilled into the Marcellus and Utica shale formations underneath Pennsylvania and Ohio has continued to increase. But output from older gas-producing states including Texas, Louisiana and Oklahoma has fallen sharply as drilling activity has dried up.

For the United States as a whole, there are no longer enough new oil and gas wells being drilled to replace declining gas output from old wells. Gross withdrawals of gas from wells were down by nearly 2 percent in April 2016 compared with the same month in 2015.

At the same time, gas consumption is rising, with deliveries to industrial customers and electric power producers sharply up.

Cheap gas has accelerated the structural shift away from coal combustion in electricity production while encouraging the expansion of more gas-intensive industrial processes.

In the short term, the developing imbalance between production and consumption was masked by an unusually warm winter in 2015/16.

Mild weather cut residential and commercial heating demand for gas and left the market carrying unusually high stocks by March 2016. (RTRS)