U.S. Natural Gas Inventory Dynamics and Market Implications

In the winter of 2023/24, U.S. natural gas inventories surged to levels not seen since 2016, with storage volumes peaking at 2,484Bcf by late April. This significant stockpile was influenced by unusually mild weather associated with one of the strongest El Niño events in recent history, leading to decreased heating demand. The Energy Information Administration (EIA) reported that these inventories were 37% above the ten-year average for this period.

The impact of these high inventories extended to natural gas prices, which plummeted to historical lows. By March 2024, Henry Hub front-month futures prices had dropped to an average of $1.75 per million British thermal units, marking the lowest real-term prices in over three decades.

Despite these challenges, the balance between supply and demand began to restore as low prices spurred increased consumption by gas-fired power plants. This trend was encouraged by the shift from coal to gas-fired units over the past decade. By the end of 2023, gas-fired generation capacity had increased significantly, while coal capacity declined sharply.

The operational rates of these gas-fired units during the winter months reached new highs. Combined-cycle generators, known for their efficiency, operated at 63% of their maximum capacity, while the less efficient single-cycle turbines reached 14%. This shift helped in consuming excess inventories, even amidst the warm weather conditions.

Looking forward, the market dynamics are set to change with the fading of El Niño conditions and a forecasted colder winter in 2024/25. This anticipated increase in heating demand, coupled with robust gas-fired electricity generation and rising exports, is expected to help rebalance the market. Natural gas exports, both via pipelines and as liquefied natural gas (LNG), are playing a growing role in shaping domestic gas economics, with exports in February 2024 accounting for 21% of total U.S. dry gas production.

Furthermore, the sustained low prices have led to reductions in drilling activities, with the number of rigs drilling for gas decreasing consistently since early 2024. This slowdown in new well completions could lead to a tightening of supplies, potentially eliminating the surplus and supporting a price recovery by the end of the winter season of 2024/25.

In summary, while the U.S. natural gas market faced significant challenges due to high inventories and low prices, strategic consumption increases, a shift towards more gas-fired power generation, and a strong export market are poised to rebalance the market and stabilize prices in the coming months.