Record Southeast gas storage levels hit pause on rally in Henry Hub forwards

New York — Gas storage levels in the US Southeast are setting record highs recently as continued weakness in LNG feedgas demand and a rapid rebound in offshore production leave the region awash in supply.

On Sept. 10, Southeast inventories were estimated at 585 Bcf – their highest on record for the third consecutive day, data compiled by S&P Global Platts Analytics shows.

Within the US Energy Information Administration's South Central region, which includes Texas but omits states along the southeastern seaboard, storage inventories were estimated Sept. 10 at 1.24 Tcf as of the week prior – just 130 Bcf below their own record-high level recorded in November 2016.

As many Gulf Coast and Southeast storage caverns test their capacity limits, forwards markets at the Henry Hub are taking notice, pausing the rally in balance-of-year gas prices. On Sept. 9, fourth-quarter strip prices at the benchmark hub pulled back to an average $2.84, down from an annual high in early September at $2.95/MMBtu, S&P Global Platts' most recently published M2MS forwards data shows.

Feedgas, production

Elevated storage levels in the Southeast and flagging bullish sentiment in the forwards market come as US LNG feedgas demand remains well below pre-pandemic highs recorded in the first quarter.

On Sept. 10, total US feedgas demand was estimated at 6.8 Bcf/d, its highest since early May, but still significantly below late-March highs at over 9.6 Bcf/d, Platts Analytics data showed.

Heading into October, gas demand at export terminals in the Southeast and Texas should continue rising as cargo cancellations for the month dwindle to fewer than 10, according to prior reporting by S&P Global Platts. Still, over the past two weeks, total US feedgas demand, most of which is concentrated along the Gulf Coast, has averaged only about 4.1 Bcf/d as it comes under pressure from an estimated 26 cargo cancellations this month and from recent terminal shut-ins caused by Hurricane Laura.

As the Gulf Coast region continues to recover from the storm, offshore production has also rebounded quickly, pushing additional supply onshore at a time when the region least needs it. On Sept. 10, output from the Gulf of Mexico edged up to an estimated 2.46 Bcf/d, now roughly at par to its pre-storm level, data from Platts Analytics showed.

Q1 outlook

As the forwards market pauses its rally in balance-of-year gas prices, the longer-term outlook still remains decisively bullish. On Sept. 9, January, February and March forwards settled at $3.36, $3.23 and $3.20/MMBtu, respectively – no more than 3 cents below recent annual high settlements for the calendar-month prices.

Over the longer-term, sharply lower production levels that remain about 9 Bcf/d below pre-pandemic highs, along with growing domestic and export demand, promise to dramatically increase the call on storage this winter. Particularly on the coldest days, daily production will fall drastically short in meeting heating-demand requirements, which have alone spiked to levels near or exceeding 70 Bcf/d in recent seasons.