ANALYSIS: Forward market remains bullish on Henry Hub, despite cash-market volatility

New York — Winter gas prices at the Henry Hub rebounded over the past week, despite volatility in cash trading, as forwards markets continue to anticipate tighter fundamentals by late fourth quarter.

On Oct. 8, calendar-month prices for winter's peak-demand months of December, January and February settled at $3.15, $3.30 and $3.26/MMBtu, respectively – up about 15 cents over the past five trading sessions, S&P Global Platts' most recently published M2MS data shows.

The steady rebound in winter forwards comes despite recent volatility in the cash market.

In October, Henry Hub spot gas prices have bounced between a 21-year low settlement of $1.335 to trade at highs well over $2/MMBtu. On Oct. 9, the spot market was up nearly 80 cents to $2.26/MMBtu, preliminary settlement data showed.

Cash market fluctuations have accompanied an influx of milder weather that has kept downward pressure on both power-burn and residential-commercial heating demand in the US Southeast. An active season for tropical cyclones, meanwhile, has also disrupted operations at LNG terminals along the Gulf Coast, slowing production and exports.

Longer term, though, a persistent decline in US gas production and an anticipated uptick in LNG exports has kept forwards traders bullish on the winter market.

Production

In October, a steep decline in US gas production can be attributed largely to Hurricane Delta. Earlier this week, offshore platforms in the Gulf of Mexico began shuttering operations ahead of the Category 3 storm's arrival. On Oct. 9, offshore production was estimated at just 234 MMcf/d as the storm approached the Louisiana coastline.

Month to date, total US production has averaged 86.1 Bcf/d as a result of the recent offshore declines – about 1 Bcf/d below its prior-month average, S&P Global Platts Analytics data shows.

Steep cuts in drilling budgets and rig counts this year have precipitated the recent decline and could leave US production sputtering for months. At current activity levels, production would remain around 87 Bcf/d through at least mid-2021, according to a recent forecast from S&P Global Platts Analytics.

On Oct. 8, the US rig count was estimated at 323, up from a 15-year low at 279 in July. Still, earlier this year the rig count had totaled over 840 according to recent data published by Enverus DrillingInfo,

Exports

As winter-season procurement activity in Northeast Asia and China begins picking up this month, global gas prices are surging to annual high. On Oct. 9, the benchmark JKM import price was assessed at a fresh 10-month high of $5.54/MMBtu, S&P Global Platts data shows.

Stronger import prices are expected to lift US LNG production to capacity by late fourth quarter – another factor that's likely to tighten the US supply-demand balance this winter season.

For January and February, JKM prices currently trading at or near $6/MMBtu are expected to propel US feedgas demand to record highs around 11 Bcf/d, according to a recent forecast from Platts Analytics.