NYMEX Henry Hub drops to 12-week low as early winter heating demand fails to appear

The NYMEX Henry Hub prompt-month contract tumbled past a key technical support level in Nov. 30 trading, as rising production and a mild start to the heating season ease the market's fears over supply heading into winter.

NYMEX January shed 29 cents to settle at $4.57/MMBtu in Nov. 30, falling to the prompt-month contract's lowest price since Sept. 7.

Although the NYMEX prompt-month has bounced around in recent weeks, with daily swings of 20 cents or more not uncommon, prices remained above a key technical support level.

The Nov. 30 price drop broke through this technical threshold, calculated at $4.827/MMBtu with Fibonacci technical analysis, according to Stephen Schork, principal of The Schork Report, who attributed the price drop to a lack of early winter heating demand.

"At this point, it is a weather story," Schork told S&P Global Platts in a phone interview Nov. 30.

"The outlooks through the first half of December are pretty tame. We're talking 12 weeks of winter and two out of the 12 are getting off to a pretty meager start. You're getting a lot of fear priced out of the market," Schork continued.

The National Weather Service's six- to 10-day outlook showed a likelihood of above-normal temperatures across most of the country as of Nov. 29, with the above-average prediction expanding to include the Northeast for the eight- to 14-day outlook. There is an especially strong probability of above-normal temperatures in Texas and the Southwest.

Looser fundamentals

The mild start to winter heating demand has coincided with soaring US gas production, loosening the supply-demand balance.

US gas production has averaged 95 Bcf/d over the last seven days (Nov. 24-30), according to S&P Global Platts Analytics data. Daily US gas production last crossed the 95 Bcf/d threshold in late December 2019.

The production increase has ramped up over the last month: October production averaged just 91.7 Bcf/d.

With more supply flowing into the market and heating demand subdued, storage has largely absorbed the difference, helping reduce the deficit to the five-year average. Lower 48 storage sat just 1.6% below the five-year average at 3.623 Tcf as of the most recent Energy Information Administration weekly storage report, published Nov. 24.

Outlook

From a technical trading perspective, the Nov. 30 price drop could herald some further weakness ahead, according to Schork.

"If you're modeling this, based on where volatility has been trading, you're looking at a potential lack of support between here and about $4.20/MMBtu," he said.

Phil Flynn, senior market analyst at The Price Futures Group, added that the market could also be pricing in the potential risk from the newly identified omicron variant, with concerns of "demand destruction if there are more lockdowns and factories closing."

On the other hand, Europe, with its "cold weather coming in, tight supplies, tension with Russia", could provide some underlying support for Henry Hub, Flynn said.