Source: Zhitong Finance

In the winter of 2023/24, the El Niño weather phenomenon caused abnormally mild temperatures to drastically reduce gas and electricity consumption, bringing America's natural gas stocks close to the highest level in history at this time of year. However, analyst John Kemp said ultra-low prices are maximizing the generator's gas combustion and forcing producers to cut back on drilling, which will ensure the excess is eliminated before the end of the 2024/25 winter.

According to data from the US Energy Information Administration (EIA), working gas stocks reached 2484 billion cubic feet on April 26, the highest level since 2016 and before 2012.

Inventory was 666 billion cubic feet (+37% or +1.44 standard deviations) above the 10-year seasonal average, and surpluses increased significantly from 64 billion square feet (+2% or +0.24 standard deviations) when winter began on October 1 last year.

The large carry-over of late winter stocks was mainly driven by abnormally warm weather caused by intense El Niño events in the central and eastern Pacific Ocean.

The strong El Niño phenomenon is associated with winter temperatures well above normal in northern states and a sharp decline in heating demand.

According to reports, the 2023/24 winter El Niño phenomenon was the strongest since 2015/16 and before 1997/98. North America experienced the warmest winter on record. The temperature from October last year to March of this year was more than 2.8 degrees Celsius above the long-term average. Last December was particularly warm, with temperatures above 4.6 degrees Celsius above the long-term seasonal average.

As a result, between July 1 of last year and April 30 of this year, population-weighted heating demand in the 48 US states was 11% lower than the average from 1980 to 2010.

Low consumption and excess inventories put pressure on gas prices, which fell to their lowest level in decades after excluding inflation. In March of this year, the average monthly futures price of natural gas delivered by Henry Hub in Louisiana was only 1.75 US dollars/million British thermal units, which is the lowest price in 33 years based on actual prices.

But ultra-low prices are already helping to restore the balance between supply and demand, curb the accumulation of excess inventory, and may eliminate surpluses before the end of the 2024/25 winter.

restore balance

Since mid-March, surplus stocks have remained flat for the past seven weeks, and continued to rise since October last year, except for a brief decline in January due to winter storm Heather.

Kemp anticipates that the 2024/25 winter will likely be much colder than 2023/24, and both heating demand and gas consumption will increase. Also, the El Niño phenomenon has subsided, and the frequency of this very intense event is about once every 10 years, so it is very unlikely that another strong event will occur next winter.

Abnormally low gas prices have also encouraged maximum use of natural gas generators.

By the end of 2023, the total installed capacity of gas power generation had reached 508 million kilowatts, up from 470 million kilowatts at the end of 2018 and 425 million kilowatts at the end of 2013.

These increases were at the expense of coal, which by the end of 2023 had reduced electricity generation from 303 million kilowatts ten years ago to 181 million kilowatts.

In the winter of 2023/24, low gas prices also encouraged owners of these installations to run longer.

The gas combined cycle generator (the most efficient gas-fueled unit) operated at a seasonal record close to 63% of its maximum capacity in January 2024, up from 57% in January 2023. Single-cycle gas turbines (much less efficient, mostly limited to meeting peak demand) operate at a seasonal record of 14% of their maximum capacity, up from 9% the previous year.

As a result, according to the latest EIA data, despite the unusually mild weather, the generators consumed a record amount of gas. In January 2024, generators consumed 1,158 billion cubic feet of natural gas, setting a seasonal record, nearly 166 billion cubic feet higher than the previous high in the same month of 2023.

Kemp said the continued low prices over the next two months likely ensured that generators consumed record seasonal electricity in February and March.

Eliminate surpluses

Although gas prices have risen slightly from their trough in the first quarter, they are still close to decades-long lows, which ensures that gas generators will continue to provide a larger share of electricity in the summer of 2024.

Kemp said that if hot weather occurs for a long period of time, the resulting demand for air conditioning may rapidly reduce natural gas stocks and help reduce surpluses.

At the same time, gas exports are becoming increasingly important in determining domestic stocks and prices, and will help reduce some of the excess stocks.

Pipeline and liquefied natural gas exports reached 22 billion cubic feet per day in February 2024, up from less than 21 billion cubic feet in the same period last year and 12 billion cubic feet five years ago. In February 2024, exports accounted for 21% of US domestic natural gas (dry gas) production, up from 20% in February 2023 and February 2019.

The EIA predicts that by February 2025, exports will further increase to 23 billion cubic feet per day and absorb 22% of US dry gas production.

Finally, Kemp notes that ultra-low gas prices have forced some major domestic gas producers to announce cuts to drilling and production plans.

The average number of gas rigs dropped to 108 in April, down from 115 in March and 120 in February. By the end of 2024, a reduction in the number of rigs and completed wells will slow or even turn down in production growth.

As a result, Kemp concluded that a combination of increased consumption and exports and lower production could eliminate surpluses and drive up prices before the end of winter 2024/25.