Analysis: US gas price rebound may lift stockpiles

OREANDA-NEWS. June 29, 2016. US natural gas inventories are poised to hit record levels by the end of the injection season and may even top government forecasts on resilient production and rising prices.

Prompt-month gas for July delivery settled today at a 10-month high of \\$2.917/mmBtu following a four-week rally that could reverse the recent sluggish injection rate and drive down demand in the power generation sector.

Gas prices have rebounded from their 17-year lows in March below \\$1.65/mmBtu as hot weather boosts gas demand.

US gas stockpiles, which can ease concerns about spikes in demand or supply shortfalls, have been in the spotlight this year after an unusually mild winter left inventories at a seasonal record. Those high inventories helped push prompt-month gas prices to below \\$2/mmBtu and prompted large gas producers such as Chesapeake Energy and Southwestern Energy to pare spending and idle rigs.

High levels of fuel switching this year have resulted in storage injections since 1 April that are 24pc below the five-year-average. If that refill pace continues, inventories should hit 4.14 Tcf by the end of October, well above the all-time high of 4.009 Tcf reached in early November 2015, according to US Energy Information Administration (EIA) data.

"As gas prices get closer to \\$3/mmBtu, more coal plants will come on line and less efficient gas plants will turn off," said Gelber & Associates analyst Kent Bayazitoglu. The recent price increases will also accelerate injections on a weather-adjusted basis, he noted.

The EIA, the statistical arm of the US Department of Energy, forecast in early June that stockpiles will hit 4.161 Tcf (118bn m?) ahead of the winter, a figure that may be too conservative following the recent run-up. Injections in the two weeks ended 17 June have run higher than market expectations, an early indication that power sector demand is faltering, according to the most recent data.

Higher prices could stoke additional drilling and encourage producers to bring more uncompleted wells on line.

The US natural gas rig count has increased for three straight weeks — rising to 90, the highest in about three months. The rig count is still down by 61pc from a year earlier but those lower levels of drilling could be mitigated by efficiency gains and by a backlog of so-called drilled but uncompleted wells.

US gas output will decline slowly as these wells are brought on line. The effect of this new output on supply is limited but should help sustain production through the end of this year, said Ponderosa Advisors managing partner Bernadette Johnson.

Producers continue to advance drilling and well completions, coaxing more gas from each new well. US independents like Devon Energy and Antero Resources have already increased production guidance for 2016 on higher energy prices, while keeping spending well below prior-year levels.