Big freeze completes rebalancing of U.S. gas market

Following last week’s extreme cold weather, U.S. gas prices have fallen back rapidly because the large drawdown in inventories is not expected to create a lasting shortfall later in the year.

Working gas stocks in underground storage fell by 338 billion cubic feet (-15%) in the week to Feb. 19, the largest one-week reduction since 2018.

Chartbook: tmsnrt.rs/3uAhuXj

The reduction in inventories was nearly three times the average for the same week over the last five years, according to data from the U.S. Energy Information.

As a result, the level of inventories fell below the prior five-year average for the first time since late 2019 (“Weekly natural gas storage report”, EIA, Feb. 25).

But the remaining stocks appear comfortable compared with recent years, which explains why the spike in prices was relatively small and brief.

Futures prices for gas delivered at Henry Hub in June have eased back to around $2.80 per million British thermal units, down from a peak of $3.07 last week, and broadly unchanged from the start of the month.

Despite last week’s cold weather extending unusually far down through the Great Plains to Texas, this heating season has still been warmer than the long-term average.

Cumulative heating demand since the start of the current heating season is still almost 5% below the long-term 1981-2010 average, compared with a deficit of around 11% a month ago.

One cold spell, even if it brought the Texas power grid close to collapse when generators froze and could not secure enough fuel, has not been enough to alter the course of a relatively mild winter across much of the United States.

The U.S. gas market has been working down excess inventories steadily since October, with inventories building less, or drawing down more, than the five-year average in 16 out of the last 21 weeks.

The cold spell has accelerated the rebalancing process and now appears complete, with stock levels close to normal.

U.S. gas production was running roughly 5% below prior-year levels in November, the most recent month for which full data are available, which has helped reduce excess inventories despite a mostly mild winter.

But the rise in gas and especially oil prices since their cyclical lows in the second and third quarters of 2020 should filter through into increased gas production over the next six months and bring the market back towards balance.