NYMEX Henry Hub surges to $5.50/MMBtu ahead of winter storm, potential freeze-offs

The NYMEX Henry Hub prompt-month contract spiked Feb. 2 ahead of a major winter storm that will plunge temperatures across the eastern half of the country, likely triggering production freeze-offs even as gas demand for heating and power accelerates.

NYMEX Henry Hub March settled at $5.50/MMBtu, up 75 cents, or 15%, from its prior settlement, according to preliminary CME Group data. The prompt-month contract has generally remained below $5/MMBtu over the last two months as a mild December helped keep gas demand down and storage levels near the five-year average.

Spot gas prices across the country also rose steeply, with many locations rising more than $1/MMBtu. The largest daily gains were observed in the Southwest, where forecast below-freezing temperatures are expected to simultaneously spike gas demand and stifle Permian production.

"It is a triple whammy for gas markets," David Thompson, executive vice president at brokerage Powerhouse, said in a phone interview with Platts, pointing to the combination of very cold weather, strong export demand, and lower production volumes. "Those are three of the biggest dials to twist, and each one of them is twisted in a bullish direction today."

Winter storm

In its Feb. 2 Short-Range Discussion, the National Weather Service warned of a "large-scale and massive winter storm" that will affect the central, eastern, and southern regions of the US over the next two to three days.

The agency predicted that in addition to very low temperatures, heavy snow will fall "from the southern Rockies to northern New England" and heavy ice will accumulate "from Texas to Pennsylvania."

US domestic gas demand is set to rise sharply to cope with the wintry weather, with S&P Global Platts Analytics forecasting demand to increase nearly 10 Bcf/d to 118.5 Bcf Feb. 3 and remain elevated near term, averaging 116.6 Bcf/d over the next seven days.

Export demand was expected to continue at robust levels through the storm, with Platts Analytics forecasting LNG feedgas demand to average 11.9 Bcf/d over the next week and pipeline exports to Mexico to average 5.9 Bcf/d.

Risk to production

The weather service has issued winter storm warnings for the gas-producing states of Colorado, New Mexico, Texas, and Oklahoma, raising the likelihood of freeze-offs in several key production areas.

US gas production has already begun to dip, with Platts Analytics data showing that US gas production fell to 89.3 Bcf/d Feb. 2. Gas production last fell below 90 Bcf/d in the aftermath of Hurricane Ida in late August, which took the bulk of offshore gas production offline for several weeks.

The Permian Basin in West Texas and New Mexico is particularly sensitive to below-freezing temperatures as its infrastructure is typically less weatherized against cold weather than production zones farther north. When the basin last saw below-freezing temperatures, production plunged 1.6 Bcf, or 11.5%, Jan. 2 from prior-day levels, Platts Analytics data shows.

The weather service forecast temperatures in Midland, Texas, will drop sharply Feb. 2, with the low plunging to 17 degrees Fahrenheit. The freeze was forecast to deepen Feb. 3-4, with high temperatures remaining at or below freezing and lows falling to 10 F Feb. 3, and 13 F Feb. 4.

Market concerns about possible Permian freeze-offs were evidenced in regional spot gas pricing Feb. 2, which saw large gains in both production zones and demand locations that rely on Permian supply.

Waha Hub cash prices surged $1.94 to trade at $7.245/MMBtu, according to preliminary Platts settlement data, which will be its highest price since the February 2021 deep freeze if it holds to final settlement. Farther west, cash prices at El Paso, South Mainline, which accounts for gas flowing west to Southern California demand centers, surged $3.12 to $9.04/MMBtu at the preliminary settlement.

Outlook

Although the worst of the winter storms were predicted to dissipate by Feb. 5, temperatures across the eastern half of the country are largely expected to remain below normal through Feb. 7, according to Platts Analytics and CustomWeather.

Forecasts for the second week of February show higher temperatures across the board, with the biggest thaws expected in Texas and the Southeast.

In the event of freeze-offs, production could come back online relatively quickly after the return of temperatures to normal ranges. Looking at the Permian's last experience of freeze-offs, gas production rebounded 1.1 Bcf Jan. 3, following its Jan. 2 dip, and had ramped back up to pre-freeze levels by Jan. 13.