ANALYSIS: Colder weather spurs Henry Hub cash rally as forwards market stays bearish

New York — Winter-like weather across much of the continental US this week is lifting natural gas demand to its highest yet this season. As cash prices at the Henry Hub rally, though, forward markets remain bearish.

On Dec. 1, temperatures across much of the US plunged into the 30s and 40s F, with even colder temperatures in the Midwest and the Rockies, National Weather Service data showed.

The arrival of winter temperatures is fueling a long-awaited surge in gas demand that comes following the mildest November in four years. On Dec. 1, heating demand from homes and businesses jumped to an estimated 41.8 Bcf, pushing total US gas consumption to over 109 Bcf – both the highest levels recorded since last February, data compiled by S&P Global Platts Analytics showed.

Following a prior-day gain of 60 cents at the Henry Hub, cash prices were down about 4 cents on Dec. 1 to around $2.83/MMBtu, according to preliminary settlement data from S&P Global Platts.

Temperatures are expected to remain colder through the end of this week. According to Platts Analytics, that should keep residential-commercial heating at over 40 Bcf/d through at least Dec. 4. Forecasts for the second week of December, though, show milder temperatures and lower demand ahead.

Forward market

As the surge in heating demand fuels a rally in cash prices, the forward market is taking a wait-and-see approach on pricing for this winter.

On Nov. 30 forward prices for January, February and March 2021 settled at $2.88, $2.87 and $2.80/MMBtu, respectively. Since late October, prices on all three calendar-month contracts are down about 50-60 cents/MMBtu, Platts' most recently published M2MS data shows.

Persistent bearishness at the Henry Hub comes as weather forecast continue to predict an elevated likelihood for above-average temperatures in December, January and February.

In a month-ahead forecast revised Nov. 30, the Weather Service predicted a 33%-50% chance for mild weather in December across most of the US, excluding portions of the Pacific Northwest and nearly all the Southeast including coastal Texas. In an earlier forecast, the agency also predicted warmer weather in January and February for most of the US, excluding portions of the Midwest, the Upper Plains and the Northwest.

Critically, the Weather Service forecast comes following an already bearish start to winter. In the Northeast – the US' largest heating market – this past November was the warmest on record dating back a decade or more, Platts Analytics data shows.

In addition to recent price pressure in the cash market, mild weather has kept storage volumes elevated.

Just prior to the Thanksgiving Holiday, US gas in storage was estimated at 3.94 Tcf as of the week ending Nov. 20 – 250 Bcf above average and the highest late-November volume on record dating to 2016, the most recent data from the US Energy Information Administration showed.

In the final week of November, mild weather and a holiday-related drop in gas demand could keep storage volumes elevated. According to a survey of analysts conducted Dec. 1 by Platts, the EIA is likely to announce just a 13 Bcf drawdown to inventories, pushing the storage overhang into December in a move that's likely to keep more pressure on the forward market.