Analysis: U.S. gas surplus will be eliminated before end of winter 2024/25

LONDON (Reuters)—U.S. gas inventories are near record highs for this time of year after exceptionally mild temperatures linked to the El Niño weather phenomenon slashed gas and electricity consumption for heating during the winter of 2023/24.

But ultra-low prices are maximizing gas combustion by power generators and forcing producers to cut back drilling, which should ensure the surplus is eliminated before the end of winter 2024/25.

Working gas inventories amounted to 2,484 billion cubic feet (Bft³) on April 26, the highest for that time of year since 2016 and before that 2012, according to data from the U.S. Energy Information Administration (EIA).

Inventories were 666 Bft³ (+37% or +1.44 standard deviations) above the 10-yr seasonal average and the surplus had swelled from 64 Bft³ (+2% or +0.24 standard deviations) at the start of winter on Oct. 1.

The massive carryover of inventories at the end of the winter was primarily driven by exceptionally warm weather stemming from very strong El Niño conditions in the central and eastern Pacific Ocean. Strong El Niño conditions are associated with much warmer-than-normal winter temperatures across the northern tier of states and a sharp reduction in heating demand.

The winter of 2023/24 was characterized by the strongest El Niño conditions since 2015/16 and before that 1997/98. North America experienced the warmest winter on record, with temperatures between October and March more than 2.8 C above the long-term average. The month of December was particularly warm, with temperatures more than 4.6 degrees Celsius above the long-term seasonal average.

As a result, between July 1 and April 30, population-weighted heating demand across the Lower 48 states was 11% below the 1980-2010 average.

Low consumption and excess inventories weighed on gas prices, pushing them down to some of the lowest levels for decades after adjusting for inflation. Front-month futures prices for gas delivered at Henry Hub in Louisiana averaged just $1.75/MMBtu in March 2024, the lowest price for more than 33 years in real terms. But ultra-low prices are already helping restore balance, arresting the accumulation of excess inventories, and are likely to eliminate the surplus before the end of winter 2024/25.

Restoring balance. Surplus inventories haven been flat over the last seven weeks since the middle of March, after rising consistently since October, except for a brief depletion associated with Winter Storm Heather in January.

The winter of 2024/25 is likely to be significantly colder than the winter of 2023/24 with more heating demand and gas consumption. El Niño conditions have already faded and very strong episodes occur with a frequency of about one out of every 10 years, so the probability of another strong episode next winter is low.

Exceptionally low gas prices are already encouraging maximum use of gas-fired electricity generating units at the expense of coal. Total gas-fired generation capacity had reached 508 million kilowatts (kW) at the end of 2023, up from 470 million kW at the end of 2018 and 425 million kW at the end of 2013.

The gains have come at the expense of coal where capacity had been reduced to 181 million kW at the end of 2023, down from 303 million kW a decade earlier. Low gas prices incentivized owners of these units to run them for many more hours during the winter of 2023/24.

Gas-fired combined-cycle generators (the most efficient gas-fueled units) operated at a seasonal record of almost 63% of their maximum capacity during January 2024, up from 57% in January 2023. Single-cycle gas turbines (which are far less efficient and mostly limited to meeting peak demand) operated at a seasonal record of 14% of their maximum capacity, up from 9% a year before.

As a result, electricity generators burned through record volumes of gas despite exceptionally mild weather, according to the latest EIA data. Generators consumed 1,158 Bft³ of gas in January 2024, a seasonal record, and almost 166 Bft³ more than in the same month in 2023, the previous high.

Low prices persisted throughout the next two months and are likely to have ensured generators consumed record seasonal volumes in both February and March.

Eliminating surplus. Although prices have risen slightly from their trough in the first quarter, they remain close to multi-decade lows, ensuring gas-fired generators will continue to supply an enhanced share of electricity in the summer of 2024.

If there are any extended periods of very hot weather, the resulting air-conditioning demand is likely to draw down gas inventories rapidly, helping narrow the surplus. At the same time, gas exports have become increasingly critical in determining domestic inventories and prices and will help reduce some of the excess stocks.

Pipeline and LNG exports amounted to 22 Bft³d (Bft³d) in February 2024, up from less than 21 Bft³d in the same month a year earlier and 12 Bft³d five years ago. Exports amounted to 21% of all domestic dry gas production in February 2024, up from 20% in February 2023 and 13% in February 2019.

By February 2025, the EIA forecasts exports will have risen further to 23 Bft³d and absorb 22% of all domestic dry gas production. Finally, ultra-low prices have already forced some major domestic gas producers to announce cuts to their drilling and production programs.

The average number of rigs drilling primarily for gas had fallen to 108 in April, down from 115 in March and 120 in February. Fewer rigs and completed wells will filter through into slower growth or even an outright decline in production before the end of 2024.

The combination of higher consumption and exports and lower production is likely to eliminate the surplus and push prices higher before the winter of 2024/25 is over.

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

 

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