Analysis: Henry Hub cash, futures rally continues but regional storage could pose downside risk

New York — Henry Hub gas prices continued to rally on Aug. 5, rising to their highest in over eight months, supported by stumbling production and rising demand from the industrial and LNG sectors.

In midsession trading, cash prices were up another 17 cents to $2.18/MMBtu. Just since the start of August, the benchmark spot index has gained 43 cents, or nearly 25%, data from S&P Global Platts shows.

On the NYMEX, September futures were up nearly 7 cents to $2.26 before settling to $2.19/MMBtu. Since the August contract expired, prompt-month prices have climbed 39 cents.

The recent and abrupt rise in benchmark US gas prices this month comes as the recovery in US gas production appears to have stalled. August to date, domestic output has averaged 87.4 Bcf/d, down about 200 MMcf/d compared to the prior-month average, S&P Global Platts Analytics data shows.

The US Gulf Coast market has been among the hardest hit by faltering production.

In the Haynesville, rig cuts have put output on a downward trajectory since mid-May. Month to date, production from the Texas-Louisiana play has averaged 11.9 Bcf/d, down roughly 100 MMcf/d compared to July. In May, Haynesville production averaged a record high 13.1 Bcf/d.

Supply from the Permian Basin is also down this month, averaging about 10.6 Bcf/d amid ongoing pipeline maintenance in West Texas, some of which is expected to extend through the end of August. After falling to just 9.1 Bcf/d in late May, Permian production rebounded sharply, rising to over 12 Bcf/d last month, Platts Analytics data shows.

Industrial, LNG demand

Continued gains in gas demand are also supporting the recent rally in gas prices.

In the industrial sector, strong consumption growth from the refining and chemicals segments have lifted demand to nearly 20.8 Bcf/d this month, up about 500 MMcf/d from the July average.

Industrial-sector demand bottomed out in late June around 19.5 Bcf/d and has climbed steadily since. According to Platts Analytics, a full recovery from pandemic-related declines, to levels around 25 Bcf/d, isn't likely prior to first-quarter 2021.

A more rapid recovery in the LNG export sector, though, now appears to be underway. Month to date, feedgas demand is averaging 4 Bcf/d, up from recent lows around 3 Bcf/d. With significantly fewer cargo cancellations anticipated for September, export demand could see significantly more upside by later this month. Recent analytics forecasts show demand averaging over 6 Bcf/d by next month.

Storage risk

While a recent tightening in US supply-demand fundamentals continue to support the rally in benchmark gas prices, elevated inventory levels in the Southeast could pose a downside risk to prices by autumn.

Since late July, Southeast storage levels have climbed about 13 Bcf to 555 Bcf. Historically, from mid-July through August Southeast inventories typically decline to meet peak summer demand in the region.

This summer, though, a rapid build in storage volumes is already underway following a brief, two-week period of decline last month. At an estimated 555 Bcf, Southeast storage is 32% above its prior five-year average and now just 23 Bcf shy of its record-high level at 578 Bcf, Platts Analytics data shows.

Over the coming weeks, continued inventory additions could limit injection capacity in September and October when lower shoulder-season gas consumption is typically offset by storage demand – a key factor that could put downward pressure on regional prices by autumn.