Sultry weather, gas supply imbalance fuels steep basis premiums east of Henry Hub

Natural gas markets east of Henry Hub are bracing for a further hike in basis prices this week as rising temperatures and power demand across the US Southeast keep the regional market tightly supplied.

On July 19, gas prices at Transco Zone 3 and Zone 4 were trading around $11.60-$11.70/MMBtu, down just 5-6 cents on the day but up sharply from weekend settlement prices in the low-$9s.

At Florida Gas Zone 3, where basis valuations have also diverged sharply from Henry Hub this month, prices were also down about 5 cents on the day to the mid-$12.20s/MMBtu – still elevated compared with a weekend settlement in the low-$10 range, Platts and Intercontinental Exchange data showed.

Already high prices at Mississippi, Alabama and Florida gas hubs could be in for another hike this week.

In Texas, Louisiana, Mississippi, Arkansas and Tennessee temperatures are forecast to top 100 degrees Fahrenheit this week with low 90s expected along the Gulf Coast, according to the National Weather Service. In cities across the region, the agency has already issued excessive heat warnings or heat advisories.

Over the next two weeks, gas demand from power generators across the US Southeast is expected to rise steadily, keeping the region's spot markets competing for supply. Later this week, power burn in the US Southeast is expected to approach 14.9 Bcf/d – up from an average 13.9 Bcf/d over the past week. By the final week of July, power burns are forecast to top 15 Bcf/d and approach 16 Bcf/d by early August, data from S&P Global Commodity Insights shows.

Southeast supply tightens

Over the past 12 months, gas demand from power generator and LNG export terminals in the Southeast has surged. This July, regional power burn demand is up by nearly 2.5 Bcf/d compared with it's year-ago level. Demand from LNG terminals, meanwhile, is up about 2.25 Bcf/d over the same period.

Along with smaller gains in residential-commercial and industrial consumption, total gas demand in the Southeast has grown by nearly 5.4 Bcf/d this July compared with last. With nearly 70% of US LNG export demand now located in Louisiana, much of the recent uptick in Southeast gas demand appears to be concentrated around the state's benchmark Henry Hub – potentially leaving less gas to move eastbound towards Mississippi, Alabama and Florida, where gas prices have spiked recently.

For the premium basis markets along the eastern Gulf Coast, insufficient storage capacity could be another major factor behind the widening price divergence to Henry Hub. According to Platts Analytics data, most of the Gulf Coast region's storage appears to be concentrated in East Texas and Louisiana, with states further east accounting for a substantially smaller portion of the region's total capacity.

Forward gas markets are already betting that bullish drivers in the eastern Gulf Coast market remain in place over the balance of summer. In recent trading, August gas prices at Transco Zone 3 and Zone 4 have remained at a high-$3 to nearly-$4/MMBtu premium to Henry Hub. At Florida Gas Zone 3, the premium remains in the low- to mid-$4 range, Platts M2MS forwards data shows.