Henry Hub Q4 forwards test annual highs as winter supply outlook tightens

New York — Fourth quarter forwards prices at the Henry Hub are setting consecutive annual highs in recent trading as US gas production remains below pre-pandemic levels, raising concern over tightening winter supply.

On Sept. 4, the Q4 strip settled at an average $2.95/MMBtu, less than a penny below its prior annual high in late August, S&P Global Platts' most recently published M2MS forwards data shows.

In the cash market, Henry Hub gas was trading sharply higher on Sept. 8, up over 40 cents to $2.34/MMBtu, as the index rebounded from a prior-session selloff of similar magnitude.

Higher benchmark gas prices come as US production continues to hover some 8 Bcf/d, or nearly 9%, below its record-high monthly average at 95 Bcf/d in November 2019.

Dramatic cuts in drilling budgets and rig counts this year could leave US production sputtering for months to come. At current activity levels, US output would remain around its recent 87 Bcf/d level through at least mid-2021, a recent forecast from S&P Global Platts Analytics shows.

On Sept. 3, the US rig count was estimated at 285, just six rigs above a recent 15-year low. In January, the US rig count totaled around 840 rigs – already significantly below a prior, multiyear high at nearly 1,200 rigs in early 2019, recent data published by Enverus DrillingInfo shows.

Demand

As US supply growth remains suspended in the months ahead, domestic and global demand for US gas production should continue growing. In the US market, a return to more seasonal winter temperatures this year could fuel a significant uptick in heating demand compared to winter 2019-2020. On the global market, rising LNG prices could boost US export volumes back toward full capacity.

A recent three-month outlook published by the US National Weather Service shows this winter's peak-demand months of December, January and February trending slightly warmer again this year, with a 33% to 40% probability for above-average temperatures along the Eastern Seaboard, the lower Mississippi River Valley and, less critically, in states across the South and the West.

Even modestly colder temperatures compared to last winter, though, could significantly boost gas-fired heating this season. From December to February, 10-year average temperatures would lift US heating demand to to 46 Bcf/d, or about 2.2 Bcf/d higher compared with last winter, according to S&P Global Platts Analytics.

Stronger LNG demand could also significantly tighten the winter supply balance.

In recent trading, Platts JKM January swaps prices have strengthened to nearly $6/MMBtu, with the prompt cargo market now trading at over $4.60/MMBtu.

Stronger US netbacks to the JKM and to European destinations could see US terminal capacity reach full or near-full utilization by this winter. Following the commercial startup of new Gulf Coast liquefaction trains this summer, US feedgas demand could rise to over 11 Bcf/d by late fourth quarter, Platts Analytics data shows. On Sept. 8, early cycle data showed US feedgas demand rising to over 5.3 Bcf/d, or its highest since late May.