NYMEX Henry Hub gas futures prices reversed course this week amid growing bearish sentiment over short-term weather forecasts and technical factors as the prompt market flouts underlying supply tightness that's likely to persist over the balance of 2021.
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NYMEX August shed 10 cents over the last two trade days to settle at $3.60/MMBtu July 7, according to preliminary settlement data from CME Group.
The selloff halted a rally that saw the prompt-month Henry Hub contract climb 50 cents over two weeks to $3.70/MMBtu July 2, its highest price since December 2018.
"Obviously, the weather has been the story," Stephen Schork, founder and editor of The Schork Report, said. "I think the rally got overheated on weather expectations," he said, referencing a heat wave that swept the West, Midwest, and Northeast during the latter half of June.
"The hedge funds were significantly short going into this rally. A few weeks ago, for every hedge fund that was long Henry Hub, a bearish one was short 1.6 contracts. That was well into the high 95th percentile, one of the most bearish ever, and the hedge funds got caught flat."
David Thompson, executive vice president at brokerage firm PowerHouse, added to the technical perspective.
"Measurements of overbought had gotten to extreme levels," Thompson said. "There are moments where you get too exuberant in the market, and then you get a selloff."
Technical movements and near-term weather forecast fluctuations aside, the longer-term supply and demand fundamentals continue to support a bullish trend, especially further down the forward curve...
NYMEX Henry Hub's remainder-of-the-summer strip (August – October 2021) settled at an average of $3.58/MMBtu July 7, down 10 cents from a July 2 peak of $3.68/MMBtu. The strength extends into the 2021-2022 winter strip (November 2021 – March 2022), which is now averaged at $3.56/MMBtu.
Gas-fired power generation has been remarkably resilient this June and July, defying expectations that the higher gas prices would lead to widespread gas-to-coal fuel switching. S&P Global Platts Analytics data shows that gas-fired power burn averaged 36.5 Bcf/d in June, with some days surpassing 44 Bcf/d.
Exports continue to provide support for strong NYMEX Henry Hub pricing as well. LNG feedgas demand has averaged nearly 11 Bcf/d so far in July and pipeline exports to Mexico have averaged 6.5 Bcf/d.
On the supply side, Platts Analytics data shows that year-to-date gas production volumes trail 2020 levels, down 700 MMcf/d to 90 Bcf/d.
"The question 'will there be more production eked out?' was a driving theme of the rally," Thompson said.
"The idea that the capital discipline set in 2020 would impact drilling decisions — that was the set up for the rally this year. We wouldn't have the ability to go back in and start drilling more because the spending decisions had already been made. Now we're in shouting distance of $4 bucks though, that might change at the margins," Thompson added.
Since the start of injection season, the combination of strong export and power burn demand has widened national storage levels' deficit to the five-year average to 5.3%, while the deficit to year-ago levels has ballooned to 16.6%, US Energy Information Administration data showed.