Henry Hub gas tops $4 as hot weather fuels concern over supply constraints, storage

Natural gas prices at the US benchmark Henry Hub recently zoomed past the $4 level, where the market continued to trade July 23 amid renewed bullishness over hot weather and strong power burn demand.

In midday trading, cash prices at the Louisiana hub jumped 10 cents to $4.05/MMBtu with prompt-month forwards and futures holding around the same level. Further along the forward curve, prices were trading firmly above $4 through March, data from the Intercontinental Exchange showed.

Forecasts calling for above-average temperatures from late-July through September have set a bullish foreground for a market already stretched thin by tight supply-demand fundamentals.

Weather

The National Weather Service's most recent six- to 10-day outlook showed a strong likelihood of above-normal temperatures across most of the country, with probabilities of 80% or higher for the Northwest and Midwest.

The agency's eight- to 14-day outlook also reflected a likelihood of above-average temperatures. In both outlooks, only the New England region had a forecast of below-normal temperatures.

Gas-fired power generators will likely be called upon to ramp up to cope with the coming surge in cooling demand, despite the higher price environment.

"There isn't a lot of room for a fuel-switching response for power generators to move back to coal, given that we are at the peak of the summer season. The fundamentals aren't there to hold back the price rally, at least in the short-term," Daniel Myers, a market analyst with Gelber & Associates, said by telephone July 23.

S&P Global Platts Analytics' near-term projections bear out this demand inelasticity, with the forecast showing a substantial run-up in US gas-fired power demand over the next two weeks to 44 Bcf/d by August 4-6, from 38 Bcf/d on July 24.

Storage

Over the next six to seven weeks, hot weather could keep injections to US gas storage fields at a minimum, potentially expanding this season's already sizeable inventory deficit.

On July 22, even a bearish injection reported by the US Energy Information Administration wasn't enough to halt momentum in the spot, futures and forward markets.

"Essentially we're pricing in the anxiety about winter storage," Gelber said.

"The market is trying to elicit a response from fundamentals that will ease its anxiety. But the heat we're going to see, the tight fundamentals – storage will remain at a deficit given what is forecast for August weather," he said.

Concern over this season's lingering storage deficit come as US stocks remain below 2.7 Bcf, or more than 175 Bcf below average, about halfway through the current injection season. At current levels, stocks will need to rise about 1 Tcf by early November to meet average pre-winter inventory levels, likely requiring an acceleration – not a slowdown – in the pace of injections.

Supply & demand

Flat domestic production and strong export demand have set a bullish backdrop for this summer's hot weather and low storage levels.

In July, US production has averaged 90.4 Bcf/d – up 2.8 Bcf/d, or about 3%, from year-ago levels but still well below pre-pandemic highs at over 96 Bcf/d in late 2019, Platts Analytics data shows.

Export demand meanwhile has surged.

Month to date, feedgas delivered to the US LNG terminals has averaged just over 10.8 Bcf/d – up more than 7 Bcf/d from July 2020.

David Thompson, Executive Vice President at brokerage PowerHouse, pointed to strong international gas prices as part of the higher LNG demand picture, particularly in Asia.

"We have this combination [in timing] of us getting our hot weather and people who want LNG getting their hot weather, and they are willing to pay far more of the cost of shipping to get the gas," Thompson said.

Exports to Mexico are also up sharply, rising to an average 6.5 Bcf/d this month from just 5.8 Bcf/d in the year-ago period.

Outlook

Some market watchers expressed doubt that the current gas futures rally has much more life to it, highlighting technical indicators that the market could be overbought.

John Woods, president of JJ Woods & Associates, said that $4/MMBtu might be a sticking point, with a 10-cent correction possible in the near-term.

Thompson also referenced the technical overbought state, although he caveated that similar technical measures were seen in the June price rally without a substantial correction.

"Overbought can stay overbought for quite some time," said Thompson.