Gas production declines to keep US Henry Hub cash market volatile into winter

New York — Elevated price volatility and trading volume in the benchmark US Henry Hub cash market appears likely to continue through the winter season as domestic production weakness keeps the market off balance.

In October, daily changes in the Henry Hub settlement price – calculated in absolute value – have averaged 19 cents/MMBtu. On three days this month, daily price changes have exceeded 50 cents, including a single-day settlement change of 79 cents, S&P Global Platts data shows.

For a cash-market index that has seen little volatility in recent years, the daily fluctuations are notable.

In September, when the uptick in market volatility began, daily changes in the Henry Hub cash settlement averaged 12 cents/MMBtu. In the 17 months prior to that, though, daily price changes at the Henry Hub ranged from a monthly average low of 2.3 cents to a high of just 6.1 cents.

Assuming the volatility continues this month, daily price movements in October will be the largest on record since January 2018 when record cold weather and strong heating demand moved the Henry Hub daily price index an average of 41 cents each day.

Trading volume

The recent increase in Henry Hub daily price volatility has correlated with a similar uptick in trading volume. In October, daily contract volume has averaged 444 with as many as 810 contracts changing hands during a single day, S&P Global Platts data shows.

The uptick in volume likely comes as traders, agnostic to price, look to profit on the volatility and as producers and end-users maneuver around existing positions and hedges.

Supply and demand

The concurrent surge in price volatility and trading volume at the Henry Hub has accompanied large daily fluctuations in both supply and demand since late August.

A recent flurry of hurricanes and tropical storms in the Gulf of Mexico is likely to blame.

Since late August, at least six tropical cyclones have enter or formed within the Gulf of Mexico, threatening both offshore and onshore production, as well as LNG feedgas demand.

In the seven weeks since category 4 Hurricane Laura struck the Louisiana coastline, US offshore production has twice fallen to just over 200 MMcf/d. Over the same period, offshore production has averaged just 1.6 Bcf/d – about 1.2 Bcf/d below its January to July average, S&P Global Platts Analytics data shows.

The recent storms have also caused major setbacks to demand – mostly in the form of feedgas deliveries to the Gulf Coast LNG terminals. Since late August, Hurricane Laura, Hurricane Marco, Hurricane Sally, Tropical Storm Beta and Hurricane Delta have all contributed, at least in part, to recent slowdowns in liquefaction activity.

Outlook

Following steep cuts in capital spending and drilling activity this year, domestic production weakness appears likely to persist into the winter months, leaving the daily market tightly balanced.

While US storage volumes – currently estimated by the US Energy Information Administration at 3.831 Tcf – are nearly 400 Bcf above to the five-year average level, capacity limits on single-day withdrawals could create deliverability risks on peak-demand days this winter. Those risks could be particularly elevated from mid-December through January when US temperatures are often at their coldest.

The forward gas market already appears to be pricing in the increased likelihood for more extreme daily price swings this winter. On Oct. 13, calendar-month contracts for the peak-demand months of December, January and February settled at $3.25, $3.38 and $3.34/MMBtu, respectively, S&P Global Platts' most recently published M2MS forwards data shows.