Natural Gas Shortage Fears Buoy US Market as Winter Reserves Lag

Natural Gas Shortage Fears Buoy US Market as Winter Reserves Lag

(Bloomberg) -- Natural gas prices are flirting with levels not seen in the US in almost 15 years amid mounting concerns that robust domestic and overseas demand for the fuel will siphon off supplies that otherwise would be stowed for winter.

So much North American gas is feeding power plants to run air conditioners that stockpiles relied upon during the coldest months to augment pipelined supplies are still more than 10% below normal levels.

Add to that expectations that amassing reserves will get even more challenging when a key gas-export complex on the Texas coast resumes operations in October. With European buyers willing to pay almost seven times the US price, competition for spare supplies will be fierce.

New York-traded gas futures settled at the highest since 2008 earlier this week and are approaching $10 per million British thermal units. Meanwhile, one measure of volatility has been at the highest for this time of year in at least a decade. No other major US-traded commodity has been having a year like gas.

In recent days, faltering production from US wells has helped support prices, according to Gary Cunningham, a director at Tradition Energy. Domestic output has dropped by 1 billion cubic feet a day since peaking at 98.7 billion cubic feet in the week ended August 6, BloombergNEF data show.

The decline comes at a time when underground storage chambers that typically get packed with gas during the spring and summer months aren’t close to being filled. With the start of the US heating season just 10 weeks away, concerns about a potential supply squeeze mount with every passing day.

“You’re just sort of feeding gasoline into the fire, which drives the bulls,” Cunningham said in an interview. Another factor may have been traders rushing to buy futures to avoid losses on options contracts where they previously agreed to sell gas at prices that are now being eclipsed, he added.

The so-called widowmaker spread between gas delivered in March and April -- essentially a bet on how low inventories will be by the end of winter -- widened to the highest since 2006 for this time of the year.

Europe’s Crisis

In Europe, gas prices have skyrocketed as the region grapples with a historic energy crisis amid export curbs by Russia, unexpected outages and a heat wave that has boosted demand. Governments across the continent are rushing to build stockpiles ahead of winter.

Benchmark European gas has gained 12% this month to the equivalent to $67 per million British thermal units -- roughly seven times the price in the US. That means European buyers will have the upper hand over US traders when export cargoes come available. Freeport LNG’s massive Texas terminal -- hobbled by an explosion and fire earlier this year -- is expected to resume exports in October.

Scarce liquidity is adding to the volatility in US prices, according to David Seduski, an analyst at Energy Aspects Ltd. Because of higher margin requirements and interest rates, the total number of futures contracts that have been open for trade has declined to the lowest since 2016 on a weekly basis, Bloomberg data show.

“Any move that you do get is going to be currently exacerbated by the fact that there’s just not a lot of volume out there being traded right now,” Seduski said. “We don’t think that this move above $9 is sustainable.”

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