U.S. gas prices have retreated from their highest level in real terms for more than a decade as mild temperatures and fuel-switching to coal have reduced the chance stocks will fall to critically low levels by the end of winter next March. Front-month futures have retreated to $4.10 per million British thermal units, down from a peak of $6.30 in early October, which was the highest level in real terms since the financial crisis of 2008. The six-month calendar spread has fallen to a backwardation of 31 cents per million Btus, down from a record $2.30 two months ago, as traders have become more comfortable about the level of inventories. Working gas inventories in underground storage were 3,564 billion cubic feet at the end of last week, according to the U.S. Energy Information Administration ("Weekly natural gas storage report", Dec. 2). Working stocks were just 92 billion cubic feet (2.5%) below the pre-pandemic five-year seasonal average for 2015-2019, an improvement from a deficit of 180 billion cubic feet (5.8%) to the average in early September. Inventories have risen more (or drawn less) than the five-year seasonal average in 10 out of the 12 most recent weeks (chartbook: https://tmsnrt.rs/3oi9cCj). One reason is that the start of the heating season has been warmer than normal, with the number of heating degree days since the start of July around 15% below the long-term average for 1981-2010. Warmer temperatures have reduced direct consumption of gas for heating homes and workplaces as well as indirect consumption for electricity generation. Very high gas prices relative to coal have also encouraged generators to run gas units for fewer hours and rely on coal instead, especially cutting back on the use of less-efficient single-cycle gas and steam turbines. In September, the most recent month for which estimates are available, coal-fired units produced almost 53% of their theoretical maximum generation, up from just 44% in the same month a year earlier. Coal-fired units generated almost 79 billion kilowatt-hours in September, up from 68 billion kWh in the same month a year earlier. By contrast, gas-fired units generated 138 billion kWh, down from 141 billion kWh in September 2020. The improvement in the inventory position accounts for the recent retreat in both front-month futures prices and the calendar spreads from their recent highs. The probability that inventories will be depleted to critically low levels by the end of main heating season in March has fallen sharply, reflected in a much-reduced calendar spread between March and April 2022. The spread between futures prices for gas delivered in March and April 2022 has softened to a backwardation of just 17 cents per million Btus, down from $1.80 on Oct. 5. But the winter is still in its very early stages. In an average heating year, running from July 1 to June 30, just 20% of total heating degree days fall on or before Dec. 1, with 80% occurring after this date. Gas inventories have returned close to average, but shortages in Europe and Asia are providing a powerful pull on exports and prices, and there is still plenty of potential for a cold snap to send prices spiking higher. Related columns: - Global gas shortage helps lift prices in United States (Reuters, Oct. 19) read more - Worldwide energy shortage shows up in surging coal, gas and oil prices (Reuters, Sept. 24) read more - U.S. gas prices at multi-year highs will protect stocks (Reuters, July 22) read more - Rising U.S. gas prices will encourage more coal burning (Reuters, May 14)