LONDON, Oct 20 (Reuters) – U.S. natural gas stocks continue to tighten, but most traders appear unconcerned, with futures prices for gas delivered this winter close to the lowest levels since the start of the year.
Working gas stocks in underground storage were 35 billion cubic feet (bcf) below the five-year average at 3,646 bcf on Oct. 13, according to data from the U.S. Energy Information Administration.
Working stocks have tightened significantly since the middle of March, when they stood almost 400 bcf above the average and the market appeared heavily oversupplied.
But since the injection season started at the beginning of April, stocks have risen by less than average in 19 out of 28 weeks, increasing by a total of 1,594 bcf compared with an average of 1,891 bcf.
The result is that the surplus has been steadily worked off and the market has now moved into a small deficit compared with the five-year average.
In fact, comparisons with the five-year average may understate the degree of tightening, because of the rapid growth in LNG exports and the increasing number of combined-cycle gas-fired power plants.
Combined-cycle gas turbines (CCGTs) are replacing coal-fired power plants as the primary source of baseload power on the grid.
The combined capacity of CCGTs connected to the grid has grown by almost 8 percent over the last three years.
CCGTs are designed to run most of the time, providing baseload or intermediate load, and consume large quantities of fuel.
With so many additional CCGTs now in operation, there is potential for much more power burn this winter than five years ago.
Given higher exports and more CCGTs, the need for seasonal gas stocks should be higher, other things being equal.
Yet few traders seem perturbed by the continued tightening of gas stocks compared with the five-year average.
Futures prices for gas delivered at Henry Hub in December 2017 are trading at just $3.08 per million British thermal units, down from $3.69 in early May.
The calendar spread between futures prices for December 2017 and March 2018 has moved into contango, indicating the market is well supplied.
Hedge funds and other money managers have cut their net long position in futures and options linked to Henry Hub prices by the equivalent of almost 960 bcf since Sept. 19.
Fund managers are the least bullish in almost a year, with the ratio of long to short positions down to 1.76 from recent highs of 2.92 in September and 5.03 in May.