By John Kemp, Senior Market Analyst at Reuters
U.S. gas prices have surged to the highest level in real terms since the financial crisis in 2008 as strong demand for LNG from buyers in Europe and Asia puts pressure on inventories. Front-month futures for gas delivered to Henry Hub in Louisiana are trading at almost $9 per million British thermal units, up from just over $3 at the same point last year and less than $3 in 2019.
Front-month futures have surged into a record backwardation of almost $4 above futures for delivery one-year from now, as traders anticipate inventories will remain under pressure through the rest of the year.
Working gas stocks in underground storage are 335 billion cubic feet or 18% below the pre-pandemic five-year seasonal average for 2015-2019.
Inventories have remained low despite a fairly mild winter, with population-weighted heating demand this winter in the Lower 48 states around 7% below the average.
Domestic gas production has recovered to its pre-pandemic peak, according to data from the U.S. Energy Information Administration. But exports especially in the form of LNG have risen sharply, which is keeping inventories low and putting upward pressure on prices.
In recent months, LNG exports have been equivalent to 10-12% of domestic dry gas production, up from around 4% in early 2019. Exports have become a big enough share of the market they have started to enforce a partial convergence with prices in Europe and Asia.
U.S. gas supplies have tightened as Europe and Asia scramble to buy LNG to refill their own depleted storage after last winter and amid fears about a disruption of gas supplies from Russia.
The rise in prices will enforce maximum fuel-switching among power generators from gas to coal to conserve fuel stocks this summer, with spot gas now uncompetitive against coal except for peak generation.
More importantly, high prices have started to encourage more gas-focused drilling, which should continue boosting output through the end of the year and into 2023.
The number of rigs targeting gas-rich rock formations has increased to 144, up from only 100 this time last year, according to field services company Baker Hughes.
As the U.S. gas industry becomes more export-focused, drilling rates, inventories and prices are all becoming more responsive to conditions in Europe and Asia.