With prices down by almost half in the past year, it seems impolite to raise the subject of oil in Texan country clubs. But changing the subject to natural gas wouldn’t win friends, either.
Amid oil’s collapse, it is easy to forget the U.S. gas market has been struggling with shale-derived excess for years. While oil has rallied 12% in 2015, front-month gas futures are down about 2%. At around $2.90 per million British thermal units, gas is well below even its pretty dismal five-year average of $3.67.
Like oil, gas inventories are high. Unlike oil, it is certain these will keep climbing—they always do over the summer. The big question is by how much.
The “injection” season—when excess gas output is squirreled away ahead of winter—usually stops at the end of October. Last year, 1.97 trillion cubic feet of gas entered storage between early June and the season’s end, taking the total to 3.6 trillion.
Replicate that pace this year and inventories would hit 4.31 trillion cubic feet by Halloween—a record high, testing the limits of the U.S. gas storage system.
So far this year, injections are actually running ahead of last year’s season and, in contrast to oil, the number of operating gas rigs has stabilized since April.
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Still, say drillers scale back and injections are in line with the average for inventories over the past five years as defined by the Energy Department, or about 25% slower than last year’s pace. Even then, gas inventories would hit 3.83 trillion before winter, not far short of the record peak in late 2012. And it doesn’t look likely that injections will slow that much: Raymond James projects another 1.73 trillion cubic feet, taking inventories above four trillion.
Barring a harsh summer followed by a harsher winter, gas prices look set to stay moribund. The bigger risk may lie in 2016, where futures indicate an average price of $3.23. If inventories reach that dreaded four handle this year, don’t count on gas prices holding on to that three handle next.
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