In response to Russia’s invasion of Ukraine, consumers in Europe and Asia are trying to find substitute supplies, while U.S. shale drillers are finding it challenging to supply the high demand for gasoline from domestic generators.
Information from the U.S. Energy Information Administration revealed working inventories in below-ground storage tanks reached 2,771 billion cubic feet on September 9. This is the second-lowest level for this time of year since 2010.
Since late January, storage has consistently lagged behind the pre-pandemic five-year norm, and despite prices that are far higher than long-term averages, the deficit has shown no signs of narrowing.
With a shortfall of 316 bcf at the beginning of the injection period on April 1, inventories are presently 398 billion cubic feet underneath the pre-pandemic normal.
The economy’s comeback from the pandemic and this summer’s slightly above-average temperatures have put electricity generation on course to set a record this year.
Due to the retirement of coal-fired units and the drought that has reduced hydroelectric production in the western states, U.S. producers are burning record amounts of gas.
The initial five months of 2022 saw generator consumption rise to 4,372 bcf, the second highest on record only behind January through May of 2020.
Over the summer, gas burning by power generators has been even more robust, breaking a daily record in July.
As a result of new LNG liquefaction terminals being built to meet the skyrocketing demand from importers in both Europe and Asia, exports are also growing at unprecedented rates.
Front-month futures prices have risen to more than over $8 per million British thermal power stations, which is more than twice the seasonal standard for 2011–2020 and the highest after accounting for inflation since 2008. This is due to persistent scarcity.
Real prices have traded primarily between the 80th and 85th percentile rank for all periods since 1990 since late May, indicating a lack of inventories and offering a compelling argument for increased production.
The extreme backwardation of the one-year calendar spread, which trades between $2.50 and $4.00 per million Btus (99th and 100th percentile rank for all trading sessions since 2007), highlights the inventory deficit.
From 106 at the beginning of the year and a trough of just 68 during the first wave of the epidemic in 2020, the number of gas drilling rigs has increased to 166.
Per information from field services provider Baker Hughes, the number of oil rigs has increased to 591 from a pandemic record of 172 (and is likely to produce considerable associated gas).
Due to this, gas output increased by about 4% in the second period of 2022 compared to the same period in 2021; however, this increase was insufficient to fulfil the high local and international demand as well as to replenish depleted reserves.
The typical winter depletion over the past ten years has ranged from 1,541 through 3,010 bcf, whereas current inventories are just 2,771 bcf, with about two more months of injections to go.
Nevertheless, since April, hedge funds as well as other wealth managers have become less bullish about gas prices, and even slightly pessimistic.
The combined holding in the two important contracts on NYMEX and ICE amounts to a net short stance of 435 billion cubic feet, which is a significant shift from a net long position of 1,394 bcf in early April.
Many fund managers are wagering that there is room for them to recede if winter temperatures are close to average and there are no significant output disruptions because prices are already much above the long-term average.
The system will swiftly buckle under pressure if this winter’s drawdown is toward the high end of the usual range or exceeds it because of the low amount of stockpiles, which means there are few shock absorbers.