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U.S. gas glut is disappearing: Kemp
July 12, 2016 / 5:20 PM / a year ago

U.S. gas glut is disappearing: Kemp

A natural gas flare on an oil well pad burns as the sun sets outside Watford City, North Dakota January 21, 2016. REUTERS/Andrew Cullen

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

U.S. natural gas prices have risen by a third since hitting a two-decade 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 U.S. Energy Information Administration (tmsnrt.rs/29AF787).

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 (tmsnrt.rs/29tgsGw).

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 (tmsnrt.rs/29tgDSs).

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.

But the mild weather was at least partially down to the presence of El Nino in the Pacific. As El Nino fades and is replaced by La Nina, the winter of 2016/17 will almost certainly be colder, boosting gas demand.

Declining output while consumption is increasing is clearly unsustainable. As President Richard Nixon’s chief economic advisor Herbert Stein wrote: “If something cannot go on forever, it will stop”.

In the medium term, there will have to be more oil and gas drilling to stabilize gas production and meet growing demand, and that requires higher prices for oil, gas and hydrocarbon liquids.

Futures prices are already anticipating a tighter supply-demand-stocks balance at the end of next winter. Futures prices for gas delivered in March 2017 have risen 31 percent from $2.50 to $3.28 per million British thermal units (tmsnrt.rs/29thaDE).

The rise in oil and gas prices over the last four months has sparked a small increase in the number of rigs drilling, though so far mostly targeting oil-rich rather than gas-rich formations.

But moving the market onto a more sustainable supply-demand-stocks trajectory will likely require the rise in oil and gas prices to be sustained and extended to support more drilling activity while curbing consumption growth and exports.

Editing by David Evans

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