ANALYSIS: Henry Hub 2021 forward curve tops $3/MMBtu as gas demand surges, storage surplus falls

Denver — As bitter cold sweeps the continental US this month, record gas demand is fueling a rally in the Henry Hub 2021 forward market, but recent supply gains suggest that summer prices could be overheated.

With a sizeable chunk of the polar vortex now centered over North America, the US population-weighted temperature this month-to-date has averaged a chilling 37.8 degrees Fahrenheit, making February the coldest month for the US in six years, data compiled by S&P Global Platts Analytics shows.

Bone-chilling temperatures have lifted gas-fired heating demand to seasonal highs in the low 60 Bcf/d range recently, with forecasts predicting even higher levels at over 70 Bcf/d by later this week.

With spot demand for gas soaring, cash prices at the Henry Hub have jumped into the mid-$3s/MMBtu this week, pulling the forward market higher as US storage inventories are rapidly drawn down.

On Feb. 8, the balance-2021 Henry Hub forward curve edged up to highest since early November, settling at over $3/MMBtu, S&P Global Platts' most recently published M2MS forwards data shows.

Forward-market support comes largely from the balance-of-month contract, which is now priced at over $3.30/MMBtu. Summer prices have also seen gains recently, though, with the June, July, August, and September contracts all settling close to, or above the $3/MMBtu level.

Summer market

Bullish summer-market sentiment has likely been fueled mostly by the steep drawdown in gas storage, which is expected to continue through at least mid-February, Platts Analytics forecast show – a factor that could drive significant additional injection demand later this year

In its most recent storage report, the US Energy Information Administration estimated US stocks at 2.689 Tcf as of the week ended Jan. 29 – a 198 Bcf surplus to the five-year average.

Over the next three reporting weeks, though, that surplus could dwindle quickly. Current forecasts show inventories falling by a record 760 Bcf by the reporting week ending Feb. 19, dropping storage levels to 1.929 Tcf, or 175 Bcf below the prior five-year average, EIA data shows.

While the projected storage deficit will likely support summer injection demand, recent signs of an expansion in drilling activity and production activity could see supply-side growth respond quickly to sustained supply tightness and price levels near $3/MMBtu.

In the week ending Feb. 3, the US rig count moved higher for the fourth consecutive week, climbing to 456, or its highest since late April, data published by Enverus shows. After bottoming out in August, US drilling activity has accelerated recently, with operators returning nearly 175 rigs to service over the past five months as gas prices push back toward the $3/MMBtu level.

With some of the largest drilling investments directed at the Haynesville and Permian, both basins are projected to lead the resumption in US production growth by later this year, which could dampen injection demand and prices by mid-summer.

In the Haynesville, new record-high production levels in the upper 12 Bcf/d range could be achieved by later this quarter, according to recent forecasts from Platts Analytics. In the Permian, gas production is expected to remain flat to modestly lower through the summer before resuming growth in the further quarter, forecasts show.