Perspective: U.S. Gas Stocks and Prices Normalize After Cold Snap

By John Kemp, Reuters market analyst

LONDON, March 16 (Reuters) — U.S. gas prices have fallen to levels that prevailed before severe winter weather hit Texas in mid-February, confirming the big freeze is not expected to create a lasting shortfall later in the year.

The level of working gas stocks in underground storage stood at 1,793 billion cubic feet (bcf) on March 5, which was 141 bcf or 7% below the average for the previous five years.

However, in the most recent week, the rate of decline in stocks was only 52 bcf, which was 37 bcf less than the five-year average, according to data from the U.S. Energy Information Administration.

The market has rebalanced fairly quickly after the near-record weekly drawdown in stocks and sharply higher prices during last month’s cold blast (“Weekly natural gas storage report”, EIA, March 11).

Gas stocks are expected to rebuild rapidly in the shoulder season between the end of peak winter heating demand and the onset of high summer air-conditioning power demand in June, July and August.

As a result, futures prices for deliveries in July 2021 have fallen to $2.65 per million British thermal units, from a peak of $3.10 last month, reverting to levels at the end of December, when stocks were seen as abundant.

The six-month calendar spread is trading in the 63rd percentile for all trading days since 2010, down from the 89th percentile last month, confirming inventories are now perceived as more comfortable.

Gas shortages were reported in the February cold snap, with some wells freezing and pressure on pipeline supplies, so some gas-fired generators were unable to supply power to the Texas grid.

The rapid normalization of inventories, prices and spreads since then indicates the main problems were delivery logistics and the difficulty in keeping gas-fired generating units running in freezing temperatures, not inadequate gas stocks.

Hedge funds and other money managers were still relatively bullish about the outlook for prices at late as March 9, with a net long position and long-short ratio in the 83rd to 86th percentile for all weeks since 2010.

The subsequent decline in prices is likely a sign that some of these bullish fund managers have started to reduce their positions. Liquidation of more of these positions is likely to keep prices under pressure for some time.

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