ANALYSIS: Henry Hub cash and futures prices fall under pressure from production, weather

New York — Cash prices at the Henry Hub tumbled in Nov. 16 trading as gas production edges back toward a recent five-month high and weather forecasts predict more mild temperatures to continue into late November.

At market open, the benchmark Louisiana index fell nearly 25 cents, or more than 8%, to trade below $2.60/MMBtu. By mid-session, the market retraced some of its early losses, rising about 5 cents to $2.63, preliminary settlement data from S&P Global Platts showed.

Downward pressure in the cash market also pulled the NYMEX Henry Hub winter strip lower. The NYMEX Henry Hub front-month contract fell 29.50 cents to $2.697/MMBtu, according to CME preliminary settlement data. The Nov. 16 price drop was the largest single-day movement for December gas since it plunged 30.50 cents on Oct. 29.

The prompt-month's weakness also extended into the remainder of the winter strip, pulling the December to March 2021 contract average down to $2.80/MMBtu – about 25 cents lower compared to the prior trading day's average at $3.049/MMBtu.

Production

Pressure on Henry Hub cash and futures markets comes in the wake of recent supply surge.

On Nov. 16, gas production was estimated at 89.7 Bcf/d, just shy of a recent five-month high recorded in early November. Over the past five days, a rebound in Appalachian production has added about 2 Bcf/d to the domestic supply balance, lifting total output to an average 89.4 Bcf/d, Platts Analytics data shows.

Most of the gain has come from Pennsylvania. In the Northeast dry window, production has surged about 960 MMcf/d in the past five days, with the South Pennsylvania dry adding another 900 MMcf/d.

Heating demand

Strong production is only half the story for the Nov. 16 price drop; weaker demand is also a key factor.

Month-to-date US residential-commercial demand for heating has averaged 25.7 Bcf/d, down 13 Bcf/d from year-ago levels of 38.7 Bcf/d, Platts Analytics data shows. Although Northeast and Midwest temperatures have since fallen closer to seasonal norms, mild weather in those regions during the first half of the month sharply reduced early-season heating demand.

Chicago, a city known for its chilly winter months, saw a record-breaking warmth in early November. On Nov. 9, the temperature in Chicago climbed to 76 F, which is 3 degrees higher than the previous record of 73 degrees in 1931, National Weather Service data shows. The city's all-time high temperature record was also surpassed on Nov 10.

Boston similarly saw highs climb into the 70s F in early November. Some days were within a couple degrees of the city's all-time high temperatures for the time of year. November 6, for example, reached a high of 72 F, just 1 degree shy of the day's recorded highest temperature.

Bullish expectations for heating demand this winter had given Henry Hub's forward curve substantial support over the last several months, with the winter 2020-21 strip trading above $3/MMBtu for nearly all of August, September, and October. A remarkably mild start to this heating season, though, has been compounded by additional supply-side pressure from production and storage, all of which have weighed on the market's confidence this month.