Analysis: Widening Henry Hub cash-to-winter spread could spur record April storage injections

New York — A widening cash-to-winter price spread at the Henry Hub and a forecast calling for mild temperatures in the coming weeks could be sufficient to push a near-record volume of gas into storage this April.

On Friday, cash prices at the Henry Hub continued to test new 21-year lows near $1.45/MMBtu, preliminary settlement data from S&P Global Platts showed.

With US production averaging near-record levels around 92 Bcf/d, and mild early-spring temperatures keeping a lid on demand, the domestic market has continued to edge deeper into oversupply.

Over the past month, though, many of North America's largest oil and gas producers have announced major cuts to 2020 capital expenditures, including drilling and completion budgets, which are now widely expected drive a slowdown in associated gas production – potentially by early summer.

With forward markets anticipating tighter supply by next winter's heating season, the Henry Hub January 2021 calendar-month contract has gained nearly 12% since early March and is now approaching $2.80/MMBtu.

PRICE SPREADS, WEATHER

On Friday, the price spread between Henry Hub cash and January 2021 forwards was poised to edge past $1.30/MMBtu, the widest early-April cash-to-winter spread in more than five years, S&P Global Platts data shows.

Assuming the current price spread holds, traders could have a strong incentive to move significant volumes of gas into storage in the coming weeks in an effort to make more supply available for withdrawal during next winter's peak-demand period.

Weather, of course, will play a key role in the days ahead. Over the past decade, early-season injections in April have been limited by late winter storms and cold spells, even when cash-to-winter price spreads have been comparatively high.

Earlier this week, the US National Weather Service said that the eastern two-thirds of the continental US would likely see temperatures trend above-average in April. In states across the Northeast and the Midwest, where heating demand is most responsive to colder weather, the agency's forecast showed a 40% probability for above-average temperatures this month.

STORAGE OUTLOOK

According to S&P Global Platts Analytics, the US Energy Information Administration next week should report the US gas market's first net injection of the season at 27 Bcf for the week ending April 3. In the consecutive two weeks following, the forecast predicts net injections of 30 Bcf and 36 Bcf for the weeks ending April 10 and April 17, respectively.

Assuming five-year average injections over the balance of April, the US gas market would inject just over 240 Bcf into storage this month, making it the fourth largest injection for the month over the past decade.

Considering the favorable cash-to-winter price spread, the market's growing supply length and the possibility for coronavirus-related demand destruction in the power and industrial sectors, though, it's possible that traders could move a significantly larger volume of gas into inventory this month.

Last April, a comparatively modest cash-to-January spread that averaged 45 cents conspired with strong winter-season supply growth and mild temperatures to spur a record injection volume of nearly 375 Bcf during the month – the largest injection over the past 10 years.