Henry Hub Q4 outlook grows increasingly bearish on supply gains, demand weakness

New York — Market bullishness for a late-2020 rally in US natural gas prices continues to fade recently amid stabilizing production, continued pandemic-related demand weakness and rising storage inventories.

On June 22, fourth-quarter Henry Hub gas prices tumbled to their lowest since late March, settling at an average of just $2.313/MMBtu. In early May, the Q4 forward curve had edged up to an annual high at over $2.70/MMBtu, S&P Global Platts most recently published M2MS data shows.

In June, US gas production has averaged 86.7 Bcf/d – its lowest since August 2018. After bottoming out below 86 Bcf/d earlier this month, though, production now appears to be stabilizing, rising to an average 87.1 Bcf/d over the past week data compiled by S&P Global Platts Analytics shows.

In July, US gas production is likely to continue rising as at least some operators hit the brakes on recent production curtailments.

On June 18, Continental Resources said that it would resume over 50% of its previously curtailed oil production next month. Compared to June, output in July would rise by an estimated 75,000 to 100,000 b/d, lifting associated gas output at Continental's operated acreages in the Bakken and the SCOOP/STACK.

After reaffirming its own full-year production guidance earlier this month, the US' largest gas producer, EQT, is also likely to resume at least some of its previously curtailed output next month, potentially bringing another 1.4 Bcf/d in Appalachian gas production back online in July.

According to a recent forecast by Platts Analytics, US production should rise to an average 89.4 Bcf in July and reach an annual high at over 90 Bcf/d in August.

Demand

Weaker benchmark forward prices have also accompanied a slower-than-anticipated recovery in gas demand, fueled by a slowdown in LNG exports and continued weakness in the industrial sector.

Month to date, LNG feedgas demand is averaging 4 Bcf/d, down from record highs at over 9.6 Bcf/d in late March as export cargo cancellations cut feedgas demand at terminals across the US Gulf Coast.

On June 22, market sources told S&P Global Platts that over 40 cargoes previously scheduled for August lifting had been cancelled by offtakers. The late-summer cancellations add to those already announced for June and July, likely extending demand weakness from the LNG sector into the autumn months.

According to Platts Analytics, current weakness in the industrial sector – where demand is down by over 2 Bcf/d in June, compared to year-ago levels – is likely to continue in the months ahead as a widening global recession limits consumption of industrial outputs like petroleum, chemicals and steel.

Storage

Adding further bearishness to the market outlook for fourth-quarter gas prices, US storage inventories have trended near a 420 Bcf surplus to the five-year average over the past month, data from the US Energy Information Administration shows.

According to a recent Platts Analytics forecast, gas storage levels are likely to surpass 4 Tcf by late September. As storage reaches tank top in October and milder temperatures arrive, cash and prompt futures markets could come under renewed downward pressure during the month.

On June 22, the Henry Hub October forward contract settled at $1.89/MMBtu, just 2 cents above a record-low settlement price for the calendar month last week, Platts M2MS data shows.