NYMEX Henry Hub May continues to rise on return of high volatility, 'fear premium'

The NYMEX Henry Hub prompt-month contract burst through what has been an impassable resistance point for the last 13 years in April 11 trading, as market watchers caution that the natural gas futures market has returned to an era of higher volatility.

NYMEX Henry Hub May climbed 36.50 cents to settle at $6.643/MMBtu in April 11 trading, preliminary settlement data from CME Group shows. The prompt-month gas futures contract last finished higher on Nov. 26, 2008, when it settled at $6.878/MMBtu.

May has gained more than $1/MMBtu since becoming the front-month contract, representing an overall increase of 19% in just nine trading sessions. The recent buoyancy is a departure from recent months, during which the prompt-month contract largely remained in a $4-$5/MMBtu range, occasionally dipping below $4 or above $5 for one or two sessions. The rally began to heat up in the latter half of March, with front-month prices accelerating above $5/MMBtu starting on March 22.

The $6.10-$6.30/MMBtu range has served as a key resistance point for more than a decade, with previous price rallies in 2014 and 2021 quickly petering out after surpassing $6/MMBtu. The market has tested out crossing this threshold in each of the last four trading sessions, starting with a high of $6.394/MMBtu on April 6.

'Fear premiums have now entered the market'

Experts say that the recent rally could be a harbinger of the return to the high volatility and supply-driven price bullishness that characterized the market in the early 2000s, prior to the shale revolution unlocking trillions of cubic feet of additional domestic gas production.

"This was the normal natural gas market before the Great Recession – extremely volatile—but then with the great surge in production, we basically had a 10-year bear market in gas," Stephen Schork, principal at the Schork Report, said in a telephone interview on April 8. "A lot of people were never aware that natural gas can make the moves that we've seen this year, and I think we are entering back into an era of very high volatility."

Jay Levine, a commodities future broker at enerjay, had a similar sentiment about the post-2008 gas market balance. "When the fundamentals were so overbearing, with a lot of supply and not enough demand, fear premiums were not a factor," Levine said in an April 11 interview. "Fear premiums have now entered the market."

In the case of the ongoing rally, a potent mix of sluggish production growth and bullish demand expectations, especially in export markets, have helped propel futures prices, Schork said.

Despite rising rig counts and healthy earnings call profits in the most recent quarter, gas production has failed to see substantial gains yet in 2022. Instead, data from S&P Global Commodity Insights shows that production averaged 92.6 Bcf/d for the first three months of the year, down from 94.2 Bcf/d during the prior three months (October – December 2021).

Part of this lack of production growth can be explained by continued capital discipline by producers, with many publicly traded gas E&Ps earmarking extra cash for stock buybacks and dividends as they fight to regain investment grade ratings.

Exacerbating the supply-demand tension has been the increased inelasticity of US gas demand, as high coal prices and coal plant retirements reduce the fuel switching opportunities historically available to power utilities as gas prices rise. Similarly, strong demand for US LNG, especially in Europe, has propelled global gas prices to the point that LNG feedgas volumes will likely remain strong, even in the face of higher domestic gas prices.

Winter 2022-2023

The tighter supply-demand picture has increased uncertainty for not only the summer demand season, but the coming winter.

Substantial gains were observed along the forward curve through March 2023 in April 11 trading, with the 2022-2023 winter contracts gaining 30-37 cents to average $6.82/MMBtu at preliminary settlement. The January and February contracts both settled above $7/MMBtu, at $7.018/MMBtu and $7.117/MMBtu respectively.