LONDON (Reuters) - The U.S. gas market is looking a little tight despite another record warm winter that limited heating demand.
Growing structural consumption from electric power producers as well as increasing exports are significantly changing the balance between supply and demand.
Consumption (including exports) is now running higher for any given level of heating and cooling demand with the result the market wants to carry a higher level of inventories.
Stocks of working gas in underground storage stood at 2,049 billion cubic feet on March 24, according to the U.S. Energy Information Administration.
Stocks are 425 billion cubic feet, around 17 percent, lower than at the corresponding point in 2016 (reut.rs/2ooOkZf).
Stocks have generally remained lower this winter even though temperatures broadly matched the record warmth in 2015/16 (tmsnrt.rs/2mVt7sx).
Inventories are still 250 billion cubic feet (14 percent) above the five-year average, according to the U.S. Energy Information Administration.
But stocks do not look excessive given the underlying increase in consumption from new and planned gas-fired power plants and scheduled increases in export capacity.
Gas-fired generation capacity has increased from 432 gigawatts (GW) at the end of 2014 to 447 GW at the end of 2016 (tmsnrt.rs/2mVnnPP).
Capacity has increased in the last two years by the equivalent of the entire generation capacity of the state of Minnesota (“New wave of power plants if fuelling U.S. gas demand”, Reuters, Oct. 2016).
Most of new gas units are super-efficient combined cycle plants designed to operate for thousands of hours each year as baseload (tmsnrt.rs/2nqxTL3).
And U.S. power producers are planning to add 37 another gigawatts of gas-fired capacity during 2017/18, roughly equivalent to the entire generating capacity of the state of Georgia.
Gas-fired capacity is set to rise by a further 8 percent before the end of 2018 (“Natural gas-fired generating capacity likely to increase over next two years”, EIA, Jan. 30).
“Depending on the timing and utilization of these plants, new additions could help natural gas maintain its status as the primary energy source for power generation, even if natural gas prices rise moderately”, according to EIA.
U.S. gas exports are also rising, hitting a record 248 billion cubic feet in December 2016, up more than 50 percent compared with the same month a year earlier (tmsnrt.rs/2ogPg4w).
Underlying demand from power plant operators and exporters is making the market much tighter than the level of stocks implies on its own.
Prices have already risen to conserve stocks by encouraging power producers to run their gas-fired plants for fewer hours in the summer of 2017 and use coal-fired plants instead.
Futures prices for deliveries at Henry Hub in June 2017 are up to almost $3.30 per million British thermal units from less than $2.70 a year ago.
The calendar spread from June 2017 to June 2018 has shifted to a backwardation of 40 cents from a contango of 7 cents at the same last year (tmsnrt.rs/2ogJKyN).
Backwardation is a sign of an under-supplied market trying to conserve remaining stocks by raising the cost of short-term consumption, curb exports and stimulate more production.
The U.S. gas market feels slightly tight despite coming out of one of the warmest, if not the warmest, winters on record.
That marks a profound change from 2016 when the market felt heavily oversupplied coming out of a similar winter (tmsnrt.rs/2ogRwIZ).
The shift (same weather, radically different price structure) shows just how quickly the dynamics of the U.S. gas market are changing.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by David Evans