South Central storage drawdown fuels bullish outlook for gas futures market

Another net withdrawal from gas storage in the US South Central region is keeping an inventory deficit there largely intact through late July, helping to reignite a rally in the Henry Hub futures market.

On July 29, the latest storage report from the US Energy Information Administration showed a modest 3 Bcf drawdown from inventory in the South-Central region, dropping stocks to an estimated 999 Bcf.

While not atypical for late July, the South Central storage withdrawal is still a bullish indicator for gas demand in the US Gulf Coast region where rising pipeline and LNG exports have tightened the supply balance this summer.

The EIA's report, which also showed a slightly bearish, larger-than-average inventory build at the aggregate US level, was likely responsible, at least in part, for a surge in Henry Hub futures prices around 10:30am EST, immediately following release of the EIA's weekly report.

In midday trading, the balance-2021 futures contracts held on to earlier gains, rising 11-12 cents from the prior settlement. The now prompt-month September contract climbed to $4.08/MMBtu, while the December-January-February forward strip traded as high as $4.25, data from CME Group showed.

Storage

This week's drawdown from South Central storage narrows the regional inventory deficit to 61 Bcf, down from a 69 Bcf deficit the week prior and as much as an 84 Bcf shortfall in early July, EIA data shows.

Despite a modest narrowing in the regional deficit, a comparatively slow pace for storage injections in the South Central US this summer has raised concern in the gas futures and forwards markets over the potential for an inventory deficit to persist into the colder months.

With roughly 1 Tcf in the ground currently, the South Central states would need to inject more than 200 Bcf over the next three months to reach typical pre-winter inventory levels – potentially a stretch for a region that's likely to see inventories continue declining through August amid record export demand and relatively flat production.

Supply and demand

From June 1 to date, LNG feedgas delivered to the four Gulf Coast LNG terminals, including Sabine Pass, Corpus Christi, Cameron and Freeport, has averaged nearly 9.4 Bcf/d, data from S&P Global Platts Analytics shows. Over the same eight-week period last summer, Gulf Coast feedgas demand averaged just 3 Bcf/d amid an onslaught of cargo cancelations by exporters.

Pipeline demand from Mexico has only added to the region's export burden. Since the start of June, flows southbound from Texas to points south of the border have averaged just over 5.8 Bcf/d – a roughly 19% increase compared to average exports of 4.9 Bcf/d over the same period last summer.

Stronger exports have only been partially offset by this summer's increase in supply. From June 1 to date, total production across Texas and the Southeast has averaged 35.8 Bcf/d – up about 1.2 Bcf/d in comparison with regional output last summer. A reduction in outflows from Texas, and a boost in inflows to the Southeast has also allowed more that production to remain within region. In comparison with the June 1-to-date period last summer, net flows across Texas and the Southeast are up about 1.85 Bcf/d, data compiled by Platts Analytics shows.