Cold weather fails to lift US natural gas market

Source: The Financial Times

The onset of cold weather has failed to boost the US natural gas market, as prices tumble at the start of peak demand season amid record supply from shale formations.

Gas delivered over the weekend at the Leidy trading hub in rural Pennsylvania, which helps supply the US northeast, sold for $0.80 per million British thermal units — about a tenth of the price in Europe, according to ICE Data.

That was despite snow on Saturday and predictions that “brutal blasts of arctic air” will hit the east after a mild Sunday, according to AccuWeather.

Henry hub gas futures traded on the New York Mercantile Exchange, a broader gauge of the US market, are down 13 per cent since the official start of winter to $3 per million British thermal units, the lowest level in more than two years.

Natural gas is used to heat half of American households yet month after month, US gas output has hit record levels despite moderating prices.

Demand for gas hits a peak in winter when furnaces and power plants draw down stocks. However, the shale production boom coupled with a fairly mild start to this winter means gas stocks are just 2.5 per cent below average, according to the Energy Information Administration, the US government’s energy statistics agency.

That is in contrast to last winter, when gas stocks were drawn down to their lowest levels in 11 years after the polar vortex — a large pocket of cold air that sits over the polar region during the winter season — swept across North America.

A bottleneck at Leidy is a symbol of the US market as a whole. It sits in the heart of the Marcellus Shale, the scene of supply gains that have overwhelmed pipelines to cities.

“Central Pennsylvania is not a hotbed of economic activity or a huge population centre. The issue is really a huge dislocation in terms of where all the supply is and where it actually needs to go,” said Timm Schneider, energy analyst at Evercore ISI.

For the US market, planned exports of gas in liquefied or gaseous form have also not caught up with the supply surge, depressing national prices relative to the rest of the world.

EIA estimates the Marcellus Shale’s gas output exceeds 13bn cubic feet per day, up from less than 2bn in 2010.

“Every month it’s a new record for the Marcellus. It’s not slowing down right now,” said Rocco Canonica at Bentek Energy, a consultancy.

It is not clear when drillers will reduce output. Chesapeake, a leading producer, told analysts in November it was likely to slow down in the northern Marcellus in 2015 because prices “remain challenged”. However, it had hedged a “significant” amount of gas output at an average of $4.51, a shield against the price fall.

Pipeline operator Williams plans to add 500m cubic feet per day in capacity to its pipeline connecting Leidy to eastern markets, the company said.

The depressed gas prices are a stark contrast to last winter, when futures jumped above $6 per mBtu and spot prices leapt to double digits in some areas.

The EIA projects national inventories will be a 1.43tn cubic feet at the end of March, below average but still comfortable.